UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

June 30, 2019

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to _____

Commission file number 001-36318

ATRM HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Minnesota 41-1439182

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

5215 Gershwin Avenue N., Oakdale, Minnesota 55128
(Address of Principal Executive Offices) (Zip Code)

(651) 704-1800

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [  ]Accelerated filer [  ]Non-accelerated filer [  ][X]Smaller reporting company [X]
    
   Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

As of March 22, 2018, 2,396,219 shares of Common Stock of the Registrant were outstanding.


As of August 12, 2019, 2,526,219 shares of Common Stock of the Registrant were outstanding.




ATRM HOLDINGS, INC.
INDEX

ATRM HOLDINGS, INC.

INDEX

   Page
PART I. FINANCIAL INFORMATION 
  
 Item 1.Condensed Consolidated Financial Statements (unaudited) 
    
  Condensed Consolidated Balance Sheets as of March 31, 2017June 30, 2019 (unaudited) and December 31, 201620181
3
    
  Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2017June 30, 2019 and 20162018 (unaudited)2
4
    
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017Changes in Shareholders’ Deficit as of June 30, 2019 and 20162018 (unaudited)3
5
    
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)
6
Notes to Condensed Consolidated Financial Statements (unaudited)4 – 19
7
    
 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations20– 25
28
    
 Item 3.Quantitative and Qualitative Disclosures About Market Risk25
34
    
 Item 4.Controls and Procedures26
34
    


PART II. OTHER INFORMATION 
  
 Item 1.Legal Proceedings27
37
    
 Item 1A.Risk Factors28
38
    
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds28
38
    
 Item 3.Defaults Upon Senior Securities28
38
    
 Item 4.Mine Safety Disclosures28
38
    
 Item 5.Other Information28
Item 6.
Exhibits38
28
    
SIGNATURES29Item 6.Exhibits
38

 
SIGNATURES
39





PART 1. FINANCIAL INFORMATION


Item 1. Financial Statements

ATRM HOLDINGS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

  March 31, 2017  December 31, 2016 
  (Unaudited)    
ASSETS        
Current assets:        
Cash and cash equivalents $569  $1,247 
Restricted cash  280   150 
Accounts receivable, net  4,448   2,604 
Costs and estimated profit in excess of billings  866   1,045 
Inventories  1,304   1,404 
Fair value of contingent earn-out receivable, current  548   359 
Other current assets  409   237 
Total current assets  8,424   7,046 
         
Property, plant and equipment, net  4,335   4,393 
Fair value of contingent earn-out receivable, noncurrent  150   202 
Goodwill  3,020   3,020 
Intangible assets, net  1,925   2,117 
Total assets $17,854  $16,778 
LIABILITIES AND SHAREHOLDERS’ DEFICIT        
Current liabilities:        
Notes payable – revolving lines of credit $4,114  $3,420 
Current portion of long-term debt  1,132   1,675 
Trade accounts payable  4,719   3,776 
Billings in excess of costs and estimated profit  813   652 
Accrued compensation  440   407 
Fair value of contingent earn-out payable  991   967 
Other accrued liabilities  1,727   2,264 
Total current liabilities  13,936   13,161 
         
Long-term debt, less current portion  15,212   14,069 
Deferred income taxes  21   19 
         
Commitments and contingencies        
         
Shareholders’ deficit:        
Common stock, $.001 par value; 3,000,000 shares authorized; 2,366,219 shares issued and outstanding at March 31, 2017 and December 31, 2016  2   2 
Additional paid-in capital  69,719   69,702 
Accumulated deficit  (81,036)  (80,175)
Total shareholders’ deficit  (11,315)  (10,471)
         
Total liabilities and shareholders’ deficit $17,854  $16,778 

ATRM HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)(unaudited)
  June 30, 2019 December 31, 2018
ASSETS  
  
Current assets:  
  
Cash and cash equivalents $115
 $237
Restricted cash 70
 501
Accounts receivable, net 2,499
 3,301
Inventories 1,366
 1,790
Fair value of contingent earn-out receivable, current —
 63
Other current assets 249
 375
Total current assets 4,299
 6,267
Property, plant and equipment, net 844
 4,158
Intangible assets, net 1,116
 1,274
Right of use asset 3,431
 —
Other assets —
 8
Total assets $9,690
 $11,707
     
LIABILITIES AND SHAREHOLDERS’ DEFICIT  
  
Current liabilities:  
  
Notes payable $3,485
 $6,513
Current portion of long-term debt 3,093
 3,048
Current portion of lease liability 279
 —
Trade accounts payable 4,560
 5,886
Customer deposits 232
 184
Accrued compensation 540
 803
Other accrued liabilities 2,814
 2,857
Total current liabilities 15,003
 19,291
Long-term debt 2,173
 1,813
Lease liability 3,272
 —
Deferred income taxes 10
 10
Total long-term liabilities 5,455
 1,823
Total liabilities 20,458
 21,114
     
Commitments and contingencies 

 

Shareholders' deficit:    
Preferred stock, $.001 par value; 2,000,000 shares authorized; 597,139 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively 1
 1
Common stock, $.001 par value; 7,500,000 shares authorized, and 2,466,219 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively 2
 2
Additional paid-in capital 81,808
 82,646
Noncontrolling interest 1,000
 —
Accumulated deficit (93,579) (92,056)
Total shareholders' deficit (10,768) (9,407)
Total liabilities and shareholders' deficit $9,690
 $11,707
The accompanying notes are an integral part of the condensed consolidated financial statements.

1


ATRM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

  Three months ended March 31, 
  2017  2016 
       
Net sales $9,404  $5,051 
Costs and expenses:        
Cost of sales  8,183   5,434 
Selling, general and administrative expenses  1,703   1,027 
Total costs and expenses  9,886   6,461 
         
Operating loss  (482)  (1,410)
Other (expense) income:        
Interest expense  (563)  (301)
Change in fair value of contingent earn-outs, net  188   1 
Loss before income taxes  (857)  (1,710)
Income tax expense  (4)  (4)
Net loss $(861) $(1,714)
         
Net loss per share, basic and diluted $(0.36) $(0.78)
         
Weighted average common shares outstanding, basic and diluted  2,366   2,206 

ATRM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)(unaudited)

  Three Months Ended
June 30,		 Six Months Ended
June 30,
  2019 2018 2019 2018
Net sales $6,915
 $11,348
 $14,284
 $19,072
Costs and expenses:        
Cost of sales 5,822
 8,999
 12,176
 16,043
Selling, general, and administrative expenses 1,983
 1,967
 3,616
 3,608
Total costs and expenses 7,805
 10,966
 15,792
 19,651
Operating (loss) gain (890) 382
 (1,508) (579)
         
Other (expense) income:        
Gain on sale of assets 531
 —
 531
 —
Gain on settlement of liabilities 143
 —
 143
 —
Interest expense, net (254) (238) (517) (475)
Change in fair value of contingent earn-outs, net —
 2
 —
 4
(Loss) gain before income taxes (470) 146
 (1,351) (1,050)
Income tax expense (11) (11) (14) (15)
Net (loss) gain $(481) $135
 $(1,365) $(1,065)
Accrued preferred stock dividend $(401) $(422) $(849) $(832)
Net loss attributable to common shareholders $(882) $(287) $(2,214) $(1,897)
         
Net loss per share, basic and diluted $(0.37) $(0.12) $(0.92) $(0.79)
Weighted average common shares outstanding, basic and diluted 2,407
 2,396
 2,407
 2,396

The accompanying notes are an integral part of the condensed consolidated financial statements.

2




ATRM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Holdings, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Deficit
 (in thousands)

  Three months ended
March 31,		 
  2017  2016 
Cash flows from operating activities:        
Net loss $(861) $(1,714)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation  88   80 
Amortization expense, intangible assets  192   51 
Amortization expense, deferred financing costs  52   9 
Share-based compensation expense  17   67 
Loss on sale of equipment  —   9 
Deferred income taxes  2   2 
Change in fair value of contingent earn-out receivable  (213)  (1)
Change in fair value of contingent earn-out payable  24   — 
Imputed interest on seller deferred payment obligations  18   — 
Paid-in-kind Interest (“PIK Interest”)  613   — 
Changes in operating assets and liabilities:        
Accounts receivable  (1,844)  1,492 
Costs and estimated profit in excess of billings  179   (274)
Inventories  100   297 
Other current assets  (172)  (7)
Trade accounts payable  943   (1,127)
Billings in excess of costs and estimated profit  161   (225)
Accrued compensation  33   156 
Other accrued liabilities  (537)  (669)
Net cash used in operating activities  (1,205)  (1,854)
         
Cash flows from investing activities:        
Proceeds from earn-out consideration  76   38 
Purchase of property and equipment  (42)  (48)
Sale of equipment  11   1 
Net cash generated by (used in) investing activities  45   (9)
         
Cash flows from financing activities:        
Proceeds from issuance of long-term debt  500   — 
Proceeds from revolving line of credit  9,029   3,683 
Principal payments on revolving line of credit  (8,386)  (749)
Payment of deferred financing costs  —   (155)
Principal payments on long-term debt  (531)  (1,299)
Net cash generated by financing activities  612   1,480 
         
Net decrease in cash, cash equivalents and restricted cash  (548)  (383)
         
Cash, cash equivalents and restricted cash at beginning of period  1,397   624 
         
Cash, cash equivalents and restricted cash at end of period $849  $241 
         
Supplemental cash flow information:        
Cash paid for interest expense $213  $635 
Deferred financing costs recorded in accounts payable $55  $55 

(unaudited)


  Common Stock Preferred Stock Additional Noncontrolling Accumulated 
Total
Shareholders’
  Shares Amount Shares Amount Paid-in Capital Interest Deficit Deficit
 Balance, December 31, 2017 2,396
 $2
 547
 $—
 $83,014
 $—
 $(88,877) $(5,861)
   Share-based compensation expense —
 —
 —
 —
 41
 —
 —
 41
   Net loss —
 —
 —
 —
 —
 —
 (1,065) (1,065)
   Members' contribution —
 —
 —
 —
 —
 —
 373
 373
   Dividend on preferred stock —
 —
 —
 —
 (832) —
 —
 (832)
   Preferred dividend (PIK) paid —
 —
 33
 1
 832
 —
 —
 833
 Balance, June 30, 2018 2,396
 $2
 580
 $1
 $83,055
 $—
 $(89,569) $(6,511)
                 
 Balance, December 31, 2018 2,466
 $2
 597
 $1
 $82,646
 $—
 $(92,056) $(9,407)
   Share-based compensation expense —
 —
 —
 —
 11
 —
 —
 11
   Net loss —
 —
 —
 —
 —
 —
 (1,365) (1,365)
   Members' distribution —
 —
 —
 —
 —
 —
 (158) (158)
   Noncontrolling interest —
 —
 —
 —
 —
 1,000
 —
 1,000
   Dividend on preferred stock accrued —
 —
 —
 —
 (849) —
 —
 (849)
 Balance, June 30, 2019 2,466
 $2
 597
 $1
 $81,808
 $1,000
 $(93,579) $(10,768)

The accompanying notes are an integral part of the condensed consolidated financial statements.

3




ATRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)(unaudited)

  Six months ended June 30,
  2019 2018
Cash flows from operating activities:    
Net loss $(1,365) $(1,065)
Adjustments to reconcile net loss to net cash used in operating activities:    
Depreciation and amortization expense 301
 362
Amortization expense, deferred financing costs —
 49
Share-based compensation expense 11
 41
Provision for (recovery of) bad debts 163
 —
Gain on sale or disposal of equipment (525) (2)
Unrealized loss (gain) on lumber derivatives (14) 6
Change in fair value of contingent earn-out receivable —
 (4)
    Accrued interest (849) —
Imputed interest on seller deferred payment obligations —
 54
     
Changes in operating assets and liabilities:    
    Accounts receivable 639
 (2,068)
    Costs and estimated profit in excess of billings —
 565
    Inventories 425
 (798)
    Other current assets 140
 (42)
    Noncash lease expense 150
 —
    Other assets 8
 —
    Trade accounts payable (1,326) 1,851
    Customer deposits 48
 333
    Billings in excess of costs and estimated profit —
 (983)
Accrued compensation (263) 467
    Other accrued liabilities (73) (488)
Net cash used in operating activities (2,530) (1,722)
Cash flows from investing activities:    
Proceeds from earn-out consideration 63
 218
Purchase of property and equipment (36) (33)
Proceeds from sale of property and equipment 3,873
 16
Net cash provided by investing activities 3,900
 201
Cash flows from financing activities:    
Proceeds from long-term borrowings and finance lease obligations 300
 1,400
Proceeds from revolving line of credit 12,424
 17,065
Principal payments on revolving line of credit (15,438) (15,984)
Payment of deferred financing costs (15) —
Cash received from Joint Venture partner 1,000
 —
Principal payments on long-term debt and finance lease obligations (36) (612)
Members' (distribution) contribution (158) 373
Net cash (used in) provided by financing activities (1,923) 2,242
Net (decrease) increase in cash, cash equivalents and restricted cash (553) 721
Cash, cash equivalents and restricted cash at beginning of period 738
 541
Cash, cash equivalents and restricted cash at end of period $185
 $1,262
Supplemental cash flow information    
Cash paid for interest expense $411
 $417
PIK payment of preferred stock dividend $—
 $(833)
The accompanying notes are an integral part of the condensed consolidated financial statements.

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.BASIS OF PRESENTATION

(Unaudited)



1.    BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements include the accounts of ATRM Holdings, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Unless the context otherwise requires, references in the Notesnotes to Condensed Consolidated Financial Statementscondensed consolidated financial statements to (i) “ATRM,” the “Company,” “we,” “us” and “our,” refer to ATRM Holdings, Inc. and its consolidated subsidiaries, (ii) “KBS” refers to our Maine-based modular housing manufacturing business operated by our wholly-owned subsidiary KBS Builders, Inc. and, (iii) “EBGL” refers to our Minnesota-based operations including Glenbrook Building Supply, Inc. (“Glenbrook”), a retail supplier of lumber and other building supplies, and EdgeBuilder, Inc. (“EdgeBuilder”), a manufacturer of structural wall panels, permanent wood foundation systems and other engineered wood products, and Glenbrook Building Supply, Inc. (“Glenbrook”), a retail supplier(iv) "LSVM" refers to our Connecticut-based investment advisory company whose services include the management of lumber andpooled investment vehicles, as well as other building supplies.

specialty investment vehicles.


Through our wholly-owned subsidiaries, KBS, Glenbrook, EdgeBuilder, and EdgeBuilder,LSVM, we manufacture modular buildings for commercial and residential applications in production facilities located in South Paris and Waterford, Maine, operate a retail lumber yard located in Oakdale, Minnesota, and manufacture structural wall panels, permanent wood foundation systems and other engineered wood products for use in construction of commercialresidential and residentialcommercial buildings in a production facility located in Prescott, Wisconsin.

Our previous wholly-owned subsidiary, Maine Modular Haulers, Inc. (“MMH”) was used toWisconsin, and provide transportation, logistics and other relatedinvestment advisory services for the transportation of KBS’s completed modular buildings. In 2016, the Company decided that the shipping of KBS’s modular buildings could be done more efficiently and more economically onfrom an outsourced basis. Under the outsourced model, KBS now directly coordinates the transportation and logistics of the delivery of its modular buildings and contracts with third-party hauling companies to transport the modules. As part of the decision to move to an outsourced transportation model, we disposed of MMH’s trucks to an unrelated third party and the frames (trailers) were transferred (at book value) to KBS from MMH. MMH was officially dissolved on March 21, 2017.

office in Old Greenwich, Connecticut.

The Company’s corporate headquarters is located at Glenbrook’s offices in Oakdale, Minnesota, a suburb of St. Paul.

The Condensed Consolidated Balance Sheet at December 31, 2016,2018 has been derived from our audited financial statements. The transaction through which the Company acquired LSVM (see Note 5) was accounted for as a transfer of assets between entities under common control. Accordingly, the accompanying condensed consolidated financial statements and related notes present the combined balance sheets, consolidated statements of operations, changes in shareholders' deficit, and cash flows for all periods presented.  In the opinion of management, the unaudited interim Condensed Consolidated Financial Statementscondensed consolidated financial statements include all adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and six months ended March 31, 2017June 30, 2019 are not necessarily indicative of the operating results to be expected for the full year or any future period.

The accompanying unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted, pursuant to such rules and regulations. Therefore, these Condensed Consolidated Financial Statementscondensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statementsconsolidated financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2016.

4
2018.

2.FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

2. GOING CONCERN, LIQUIDITY AND CAPITAL RESOURCES
We acknowledge that the Company continues to face a challenging operating environment, and while we continue to focus on improving our overall profitability, we reported an operating loss for the quarter ended March 31, 2017.June 30, 2019. We have incurred significant operating losses in recent years and, as of March 31, 2017,June 30, 2019, we had an accumulated deficit of approximately $81$93.6 million. Working capital has remained negative over the past several years. Cash used in operating activities, while improved as compared to the quarter ended March 31, 2016, remains negative for the quarter ended March 31, 2017. Thiswhich has required us to generate funds from investing and financing activities.  At March 31, 2017,June 30, 2019, we had outstanding debt of approximately $20.5 million.

$8.8 million of which $6.6 million is currently payable. These factors raise substantial doubt about the Company's ability to continue as a going concern.

We have issued various promissory notes to finance our acquisitions of KBS and EBGL and to provide for our general working capital needs. As of March 31, 2017,June 30, 2019, we had outstanding debt totaling approximately $20.5$8.8 million. Our debt included:primarily included (i) $2.3$0.9 million principal outstanding on KBS’s $4.0 million revolving credit facility under a loan and security agreement (as amended, the "KBS Loan Agreement") with Gerber Finance Inc. (“("Gerber Finance”) (the “KBS Loan Agreement”Finance"), $1.8 million principal outstanding on EBGL’s $3.0 million revolving credit facility under a loan and security agreement with Gerber Finance (the “EBGL Loan Agreement”) and $3.0 million principal outstanding under a loan and security agreement with Gerber Finance used to finance the acquisition of EBGL (the(as amended, the “Acquisition Loan Agreement”);, and (ii) $4.5$2.6 million principal amountoutstanding on EBGL’s $3.0 million revolving credit facility under a revolving credit loan agreement with Premier Bank (the "Premier Loan Agreement"). We also have debt with related parties which includes (i) $1.5 million of unsecured promissory notes issued to Lone Star Value Investors, LP (“LSVI”) and $7.6 million principal amount of unsecured promissory notes issued towith Lone Star Value Co-Invest I, LP (“("LSV Co-Invest I”I"), with interest payable semiannually andsemi-annually at a rate of 10.0% per annum (LSV Co-Invest I may elect to receive interest in-kind at a rate of 12.0% per annum), with any unpaid principal and interest due on April 1, 2019 (as noted inJanuary 12, 2020 ("LSVI Co-Invest I Notes Payable", otherwise referred to herein and defined below as the LSV Co-Invest I January Note 19, the promissory notes issued to LSVI and LSV Co-Invest I were exchanged for preferred stockJune Note) (ii) $0.3 million of unsecured promissory notes with to LSVM, with interest payable annually at a rate of 10.0% per annum (LSVM may elect to receive any interest payment
ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


entirely in-kind at a rate of 12.0% per annum), with any unpaid principal and interest due on September 29, 2017);November 30, 2020 ("LSVM Note"), and (iii) $0.4a $0.3 million principal amount outstanding under an unsecured promissory note issued towith Digirad Corporation ("Digirad") (NASDAQ: DRAD), a related party, with interest payable at 10.0%per annum for the primary sellersfirst 12 months of its term, and at 12.0% per annum for the remaining 12 months, with any unpaid principal and interest due on December 14, 2020.
As of December 31, 2018, KBS payable in monthly installments of $100,000, inclusive of interest, through July 1, 2017, which have since been paid in full, with the final payment made as scheduled in July 2017. We also had obligations to make $0.75 million in deferred cash payments to the sellers of EBGL, payable in quarterly installments of $250,000, inclusive of interest, through October 1, 2017. As noted in Note 19, the deferred payments to the sellers of EBGL were restructured in June 2017.

Jeffrey E. Eberwein, Chairman of the Company’s Board of Directors (the “Board”), is the manager of Lone Star Value Investors GP, LLC (“LSVGP”), the general partner of LSVI and LSV Co-Invest I, and the sole member of Lone Star Value Management, LLC (“LSVM”), the investment manager of LSVI.

At the applicable test dates, we werewas not in compliance with the following financial covenants under our loan agreements with Gerber Finance: (i) a requirement forthe KBS to maintain a minimum leverage ratio of 7:1 for the fiscal year ended December 31, 2016, as its actual leverage ratio for such period was negative; (ii) a requirement for KBS not to incur a net annual post-tax loss in any fiscal year of the loan agreements, as KBS’sLoan Agreement requiring no net annual post-tax loss for KBS or the fiscal year ended December 31, 2016minimum leverage ratio covenant as of these test dates. Additionally, KBS was $3.2 million; and (iii) anot in compliance with the requirement to deliver the Company’sCompany's fiscal year-end financial statements reviewed by an independent certified accounting firm acceptable to Gerber Finance within 105 days from the fiscal year ended December 31, 2016.2018. The occurrence of any event of default under the KBS Loan Agreement may result in KBS’s obligations under the KBS Loan Agreement becoming immediately due and payable. In August 2017,April 2019 and June 2019, we obtained a waiver from Gerber Finance provided us with a waiver for these events. In addition, the Company and Gerber Finance agreed to eliminate the minimum leverage ratio covenant for years after 2018.

As of December 31, 2017, KBS2018, EBGL was not in compliance with the following covenants under the Premier Loan Agreement: (i) requirement to maintain a Debt Service Coverage Ratio for the calendar year of at least 1.0; and (ii) a requirement to deliver the Company's fiscal year-end audited financial covenant requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant asstatements within 120 days of the next testend of each calendar year. The occurrence of any event of default under the Premier Loan Agreement may result in EBGL’s obligations under the Premier Loan Agreement becoming immediately due and payable. In July 2019, we obtained a waiver from Premier Bank for these events through October 1, 2019 (the current maturity date December 31, 2017. We have begun discussionsof the Premier Loan Agreement).

If the Company fails to comply with any financial covenants under our loan agreements with Gerber Finance as to obtaining a waiver for these events. If we fail to obtain a waiver from Gerber Finance, Gerber Financeor Premier Bank going forward, the applicable lender(s) may demand the repayment of the credit facilities amount outstanding and any unpaid interest thereon.


We have implemented several strategic initiatives, effected certain actions and continued to consider additional actions to improve the Company’s overall profitability and increase cash flows, including:
KBS’s efforts to improve operating efficiencies, including reconfiguring the South Paris factory to increase production, investments in automated equipment to reduce labor costs, implementing lean manufacturing techniques, and elimination of duplicate overhead costs through the shut-down of the Waterford factory;
Reduction in KBS workforce including manufacturing, sales, engineering and front-office staff;
KBS implemented a new dynamic pricing model for 2018, which was designed to determine its bid price quoted to customers on the most current cost information to better ensure full recovery of its manufacturing costs and improve overall gross margins;
In November 2018, EBGL made the final payment due to the sellers of EBGL, freeing up $0.1 million per month of cash flows to be used for operations;
As discussed in Note 16, in January 2018 and in June 2018, the Company issued unsecured promissory notes in the principal amounts of $0.5 million and $0.9 million, respectively, to LSV Co-Invest I to provide additional working capital for the Company;
In April 2019, KBS and EBGL executed sale leasebacks of several of their real estate properties (see further discussion in Note 13); and
We continue to look for opportunities to refinance our remaining debt on more favorable terms.
On July 3, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Digirad, and Digirad Acquisition Corporation, a Minnesota corporation and newly-formed subsidiary of Digirad (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Digirad.  The Merger Agreement was approved unanimously by the Board, following recommendation by a special committee of independent and disinterested directors.
At the effective time of the Merger, each share of Company common stock issued and outstanding immediately prior to the effective time (other than shares (i) owned by the Company or any subsidiary, (ii) owned by Digirad or Merger Sub, or (iii) held by shareholders who have perfected and not withdrawn a demand for appraisal rights under Minnesota law (collectively (i),
ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(ii) and (iii), “Excluded Shares”)) will be canceled and converted automatically into the right to receive 0.03 shares of a newly created Series A non-convertible perpetual preferred stock, par value $0.0001 per share, of Digirad (“Series A Preferred Stock”).  Each share of the Company’s Series B Stock issued and outstanding immediately prior to the effective time (other than Excluded Shares) will be canceled and converted automatically into the right to receive 2.5 shares of Series A Preferred Stock.
In addition, on May 15, 2019, Digirad and ATRM entered into an Agreement which provides that, in the event the Merger does not close on or prior to December 31, 2019, ATRM will reimburse Digirad of certain consulting and related fees paid by Digirad on behalf of ATRM. We anticipate the Merger to close in the third quarter of 2019; however, there can be no assurance regarding timing of completion of regulatory approvals, which could delay timing of the closing, and the Merger would remain subject to the satisfaction of customary closing conditions including the passing vote of the Company's shareholders.

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We cannot predict with certainty the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned.
If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, we may not be able to continue operations. Additionally, a failure to generate additional liquidity could negatively impact our access to materials or services that are important to the operation of our business. In addition, these losses could further trigger violations of covenants under our debt agreements, resulting in accelerated payment of these loans.
There can be no assurance that our existing cash reserves, together with funds generated by our operations and any future financings, will be sufficient to satisfy our debt payment obligations, to avoid liquidity issues and/or fund operations beyond this fiscal year. Our inability to generate funds from our operations and/or obtain financing sufficient to satisfy our payment obligations may result in our obligations being accelerated by our lenders, which would likely have a material adverse effect on our business, financial condition and results of operations. In addition, continued operating losses could further trigger violations of covenants under our debt agreements, resulting in accelerated payment of these loans. Given these uncertainties, there can be no assurance that our existing cash reserves will be sufficient to avoid liquidity issues and/or fund operations beyond this fiscal year.

During 2016 and 2017, we implemented several strategic initiatives, effected certain actions and continued to consider additional actions to improve the Company’s overall profitability and increase cash flows, including:

●KBS’s strategic shift away from large commercial projects with significant site work to focus on its core competency of manufacturing modular buildings;
●KBS’s efforts to improve operating efficiencies, including reconfiguring the South Paris factory to increase production, investments in automated equipment to reduce labor costs, implementing lean manufacturing techniques, and elimination of duplicate overhead costs through the shut-down of the Waterford factory;

5


●Reduction in KBS workforce including manufacturing, sales, engineering and front-office staff;
●KBS increased pricing on its base ranch model in 2017, and in November 2017, instituted a 6% lumber surcharge on all new orders to help offset the significant rise in lumber and other raw materials costs;
●KBS has implemented a new dynamic pricing model for 2018, which is designed to determine its bid price quoted to customers using the most current cost information;
●KBS is exploring opportunities to monetize the Waterford facility, including a potential sale or lease to a third party;
●In July 2017, KBS made the final payment due to the primary seller of KBS, freeing up $100,000 per month of cash flows to be used for operations;
●

In October 2016, the Company acquired the EBGL businesses, which we believe that, after a transitional period, will generate net income and positive cash flows for the Company;

●In 2017, we instituted a lumber hedging program for EBGL to assist in preserving existing margins against the potential large fluctuations in lumber raw material prices;
●In August 2016, we amended certain of our debt agreements to allow the Company to pay PIK Interest on approximately $11 million of our debt, reducing strain on current cash flows;
●

As disclosed in Note 19, in June 2017, we refinanced EBGL’s revolving credit facility and amended the terms of our agreement with EdgeBuilder Wall Panels, Inc. and Glenbrook Lumber & Supply, Inc. (collectively, the “EBGL Sellers”) providing for deferred payments to obtain more favorable lending and payment terms and reduce total fees paid under these agreements;

●As disclosed in Note 19, in September 2017, we converted $13.3 million of the Company’s outstanding debt, including accrued interest, to preferred stock;
●As disclosed in Note 19, in January 2018, the Company issued an unsecured promissory note in the principal amount of $0.5 million to LSV Co-Invest I to provide additional working capital for the Company; and
●We continue to look for opportunities to refinance our remaining debt on more favorable terms.

Although we cannot predict with certainty the outcome of any individual action to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned, we believe that through these actions taken as a whole, and management’s continued efforts to improve operating results and find additional liquidity resources, we can satisfy our estimated liquidity needs for the next twelve months.

3.    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In addition to the above actions, although not a binding commitment, LSVM has advised us of its present intention to continue to financially support the Company in the event that additional financing is required. From 2014 through 2017, and again in 2018, LSVM has provided financial support in the form of financing through various debt agreements disclosed in Note 14 and Note 19. Based on LSVM’s historical support of the Company, management believes that additional financing may be provided by LSVM or its affiliates, if necessary, in the future.

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We believe that the actions discussed above have either already occurred or are probable of occurring, and mitigate the substantial doubt raised by our historical operating results, as well as satisfy our estimated liquidity needs for the twelve months from the issuance of the Condensed Consolidated Financial Statements.

6

3.BUSINESS COMBINATION

On October 4,February 2016, the Company acquired certain assets of the EBGL Sellers through the Company’s wholly-owned subsidiaries EdgeBuilder and Glenbrook, respectively, pursuant to the terms of an Asset Purchase Agreement, dated as of the same date, by and among the Company, EdgeBuilder, Glenbrook, the EBGL Sellers and the individual owners of the EBGL Sellers (the “EBGL Acquisition”). The Company operates the businesses of EdgeBuilder and Glenbrook on a combined basis, and such businesses are referred to on a combined basis as EBGL.

EBGL’s results are included in our consolidated statement of operations since October 4, 2016, the date of the EBGL Acquisition. The following unaudited pro forma financial information presents the combined results of ATRM and the EBGL Sellers for the three-month period ended March 31, 2016 as if the EBGL Acquisition had occurred on January 1, 2016 (in thousands, except per share amount):

  2016 
Pro forma net sales $10,080 
Pro forma net loss  (1,111)
Pro forma loss per share – basic and diluted  (0.48)

The above unaudited pro forma financial information is not necessarily indicative of what our consolidated results of operations actually would have been or what results may be expected in the future.

4.RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT

In November 2015, the Financial Accounting Standards BoardFASB issued ASU No. 2015-17,Income Taxes (Topic 740): Balance Sheet Classification2016-02, Leases. This standard requires the recognition of Deferred Taxes(“ASU 2015-17”). ASU 2015-17 was issued to simplifylease assets and liabilities for all leases, with certain exceptions, on the presentation of deferred income taxes. The amendments in this guidance require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.balance sheet. This ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and2018, including interim periods within those annual periods. As required, ATRMfiscal years. The Company adopted these updates effectiveASU 2016-02 on January 1, 2017.2019, and used the effective date as its date of initial application. As such, the Company did not adjust prior period amounts. The Company also elected to adopt the package of practical expedients upon transition, which permit companies to not reassess lease identification, classification, and initial direct costs under ASU 2016-02 for leases that commenced prior to the effective date. Upon adoption, the Company recorded a cumulative effect of initially applying this new standard resulting in the addition of $0.7 million of right of use assets and $0.7 million of corresponding short-term and long-term lease liabilities. For additional information on the required disclosures related to the impact of adopting this standard, see Note 13 to the Condensed Consolidated Financial Statements.

5.RESTRICTED CASH


In April 2019, the FASB issued ASU 2019-04 ("ASU 2019-04"), Codification Improvements to Topics 326, Financial Instruments - Credit Losses ("Topics 326"), Topic 815 Derivatives and Hedging ("Topic 815") and Topic 825, Financial Instruments ("Topic 825"). This guidance clarifies areas of guidance related to the recently issued standards on credit losses (Topic 326), derivatives and hedging (Topic 815), and recognition and measurement of financial instruments (Topic 825). The new guidance will be effective for the Company beginning in the first quarter of fiscal 2021. The Company is evaluating the impact of the adoption of ASU 2019-04 on its Consolidated Financial Statements.


4.    JOINT VENTURE
Digirad Joint Venture and Services Agreement
On December 14, 2018, the Company entered into a Joint Venture Agreement with Digirad (the "Joint Venture Agreement"), forming Star Procurement, LLC ("Star Procurement"), with each of ATRM and Digirad holding a 50% interest. The purpose of the joint venture is for Star Procurement to purchase building materials and related goods from third parties and sell to KBS Builders, Inc., the Company's wholly owned subsidiary.  Star Procurement entered into a Services Agreement (the "Services Agreement") on January 2, 2019 with KBS in connection with the joint venture.  Digirad's initial capital contribution to the joint
ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


venture was $1.0 million. ATRM did not make an initial capital contribution. The Company manages the Joint Venture and is deemed to have decision making power over this joint venture.  Thus, the Company has consolidated its operations from the date of the start of the joint venture; January 2, 2019.  Digirad’s contribution to the joint venture is considered noncontrolling interest and recorded as such in the Statement of Changes in Deficit. 
5.    ACQUISITION
Acquisition of Lone Star Value Management
On April 1, 2019, the Company entered into a Membership Interest Purchase Agreement (the “LSVM Purchase Agreement”) with LSVM and Mr. Eberwein. Pursuant to the terms of the LSVM Purchase Agreement, Mr. Eberwein sold all of the issued and outstanding membership interests of LSVM to the Company (the “LSVM Acquisition”) for a purchase price of $100. The LSVM Acquisition closed simultaneously with the execution and delivery of the LSVM Purchase Agreement, with working capital adjusted to January 1, 2019, as a result of which LSVM became a wholly-owned subsidiary of ATRM. Pursuant to the LSVM Purchase Agreement, the current assets (as well as the $0.3 million LSVM December 2018 Note issued by the Company) and current liabilities existing prior to January 1, 2019 remain with Mr. Eberwein. The LSVM Purchase Agreement contains representations, warranties, covenants and indemnification provisions customary for transactions of this type. The Company's entry into the LSVM Purchase Agreement and the LSVM Acquisition were unanimously approved by a special committee of the Company's Board of Directors (the "Board") comprised solely of independent directors.
The LSVM Acquisition was a transaction between affiliate companies. As a result, the acquisition was accounted for as a transfer of assets between entities under common control in accordance with generally accepted accounting principles ("GAAP"). The assets and liabilities of the LSVM Acquisition were transferred at their historical carrying value.
6.     REVENUE RECOGNITION

The Company adopted ASC Topic 606 Revenue from Contracts with Customers ("ASC 606") as of January 1, 2018. The underlying principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services.

In accordance with the new guidance, the Company recognizes revenue at an amount that reflects the consideration that the Company expects to be entitled to receive in exchange for transferring goods or services to its customers. The Company's policy is to record revenue when control of the goods transfers to the customer and when services are performed. Net sales are comprised of gross revenues from sales of products less trade discounts and rebates as well as fees from the management of investment advisory services, as well as other specialty investment vehicles.

The Company’s contracts do not offer a right to return any of the products sold unless covered under the assurance-type warranty offered. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation. The Company does not offer additional service-type warranties for its products.

Costs incurred to obtain a customer contract are not material to the Company for the KBS or EBGL revenue streams. The Company elected to apply the practical expedient to not capitalize costs to obtain contracts with a duration of one year or less, which are expensed and included within Cost of sales in the Condensed Consolidated Statements of Operations.

ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The Company generally requires deposits prior to the start of production of customer orders. The Company will not finance any part of the sale. The full balance is due upon delivery. Below is a summary of deposits utilized during the year by operating segment:

 Modular Home Manufacturing Structured Wall Panel Manufacturing Total
(in thousands)     
March 31, 2019$(133) $(33) $(166)
Revenue recognized that was included in deposit at beginning of period133
 33
 166
Increase due to cash received, excluding amounts recognized as revenue during the period(205) (27) (232)
June 30, 2019$(205) $(27) $(232)


The Company has expanded its financial statement disclosures as required by this new standard. See Note 20, "Operating Segments" for additional disclosures provided as a result of this ASU.
7.CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheetCondensed Consolidated Balance Sheet that sum to the total of the same such amounts shown in the condensed consolidated statementCondensed Consolidated Statement of cash flows.

  3/31/2017 
    
Cash and cash equivalents $569 
Restricted cash  280 
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated balance sheet $849 

7
Cash Flows (unaudited)(in thousands):

 June 30, 2019December 31, 2018
Cash and cash equivalents$115
$237
Restricted cash70
501
Total cash, cash equivalents, and restricted cash shown in the Condensed Consolidated Statement of Cash Flows$185
$738
Amounts included in restricted cash represent those$70.2 thousand on deposit with Gerber Finance from time-to-time as additional collateralINTL FC Stone related to support borrowing under the KBS revolving line of credit facility.

6.FAIR VALUE MEASUREMENTS

our lumber commodity hedging program. 



ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



8. FAIR VALUE MEASUREMENTS

Financial assets reported at fair value on a recurring basis included the following at March(unaudited)(in thousands):
  June 30, 2019 December 31, 2018
Lumber derivative contracts (Level 1) (1)
 $14
 $5
     
Contingent earn-out receivable, current (based on Level 3 inputs): (2)
 $—
 $63

(1) Our Level 1 assets (lumber derivative contracts recorded in Other current assets in the condensed consolidated balance sheet) fair value is based upon quoted market prices.

(2) The contingent earn-out receivable related to the transfer of our test handler product line to Boston Semi Automation LLC ("BSA") in April 2014. As of December 31, 2017 (in thousands):

  Level 1  Level 2  Level 3 
Contingent earn-out receivable related to the transfer of test handler product line:            
Current portion $—  $—  $548 
Noncurrent portion      —   150 
Total $—  $—  $698 
Contingent earn-out payable related to the EBGL Acquisition $—  $—  $(991)

The following table summarizes the activity for our Level 3 assets and liabilities measured on a recurring basis (in thousands):

  Earn-out
Receivable (1)		  Earn-out
Payable (2)		 
       
Balance at December 31, 2016 $561  $(967)
Add – adjustment based on re-assessments  213   — 
Add – net increase based on re-assessments  —   (24)
Subtract – settlements  (76)  — 
Balance at March 31, 2017 $698  $(991)

(1)Earn-out receivable related to the transfer of our test handler product line in 2014.
(2)Earn-out payable related to the EBGL Acquisition.

2018, all payments by BSA had been made.

Quantitative information about Level 3 fair value measurements on a recurring basis at MarchDecember 31, 2017,2018 is summarized in the table below:

Fair Value Asset Valuation Technique Unobservable Input 
Unobservable Input
Amount
Earn-outContingent earn-out receivable related to transfer of test handler product line Discounted cash flow Total projected revenue Performance weighted average Discount ratefor the remaining royalty period 

$11.36.9 million

60% to 125%

10 %

    
Contingent earn-out payableDiscounted cash flowEstimated gross profit for earn-out period Discount rate 

$3.4 million

10 %

2.41%

7.ACCOUNTS RECEIVABLE, NET


9.    DERIVATIVES

The Company occasionally enters into lumber derivative contracts in order to protect its gross profit margins from fluctuations caused by volatility in lumber prices. At June 30, 2019, the Company had a net long (buying) position of 1,320,000 board feet under twelve lumber derivatives contracts and had a short position of 550,000 board feet under five lumber derivative contracts with a net fair value of $13.7 thousand, which is included in other current assets. The Company had restricted cash on deposit with the broker totaling $70.2 thousand at June 30, 2019.
At June 30, 2018, the Company had a net long (buying) position of 880,000 board feet under eight lumber derivatives contracts with a fair value of $(6.0) thousand, which is included in other current assets. The Company had restricted cash on deposit with the broker totaling $56.7 thousand at June 30, 2018.
Gains and losses from derivative instruments, none of which are designated as hedging instruments, are recorded in cost of sales in the Company’s statements of operations and included the following (unaudited)(in thousands):

  Three Months Ended June 30, 2019Three Months Ended June 30, 2018
Realized (loss) gain, net $(22)$95
Unrealized gain (loss), net 35
(68)
Total $13
$27

  Six Months Ended June 30, 2019Six Months Ended June 30, 2018
Realized gain, net $35
$137
Unrealized gain (loss), net 14
(6)
Total $49
$131
ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




10.ACCOUNTS RECEIVABLE, NET
Accounts receivable consists of the following (unaudited)(in thousands):
  June 30, 2019 December 31, 2018
Contract billings $2,794
 $3,136
Fees receivable 6
 13
Retainage —
 308
Subtotal 2,800
 3,457
Less – allowance for doubtful accounts (301) (156)
Accounts receivable, net $2,499
 $3,301


11.INVENTORIES

Inventory is comprised of the following (in thousands):

  March 31, 2017  December 31, 2016 
  (Unaudited)    
       
Contract billings $4,294  $2,330 
Retainage  158   370 
Subtotal  4,452   2,700 
Less – allowance for doubtful accounts  (4)  (96)
Accounts receivable, net $4,448  $2,604 

Retainage balances are expected to be collected within the next twelve months.

8

8.INVENTORIES

At March 31, 2017 and December 31, 2016, inventories totaling approximately $1.3 million and $1.4 million, respectively, consisted of raw materials inventory. There are no finished goods or work-in-process inventory included in the inventory balances as of March 31, 2017 or December 31, 2016.

9.GOODWILL AND INTANGIBLE ASSETS, NET

  June 30, 2019 December 31, 2018
Raw materials $978
 $1,438
Work-in-process 248
 352
Finished goods 140
 —
Inventories, net $1,366
 $1,790



ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



12.    INTANGIBLE ASSETS, NET

Intangible assets are comprised of the following (in(unaudited)(in thousands):

  March 31, 2017
(unaudited)		  December 31, 2016 
  Gross Carrying Amount  Accumulated Amortization  Net Carrying Value  Gross Carrying Amount  Accumulated Amortization  Net Carrying Value 
          
Indefinite-lived intangible assets:                        
Goodwill $3,020  $—  $3,020  $3,020  $—  $3,020 
Trademarks  394   —   394   394   —   394 
Total  3,414   —   3,414   3,414   —   3,414 
                         
Finite-lived intangible assets:                        
Customer relationships  2,097   (665)  1,432   2,097   (586)  1,511 
Purchased backlog  1,290   (1,191)  99   1,290   (1,078)  212 
Total  3,387   (1,856)  1,531   3,387   (1,664)  1,723 
                         
Total intangible assets $6,801  $(1,856) $4,945  $6,801  $(1,664) $5,137 

  June 30, 2019 December 31, 2018
  Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value
Indefinite-lived intangible assets:            
Tradenames $394
 $—
 $394
 $394
 $—
 $394
Finite-lived intangible assets:  
  
  
  
  
  
Customer relationships 2,097
 (1,375) 722
 2,097
 (1,217) 880
Total intangible assets $2,491
 $(1,375) $1,116
 $2,491
 $(1,217) $1,274
Amortization expense amounted to approximately $192,000$79.0 thousand and $158.0 thousand for each of the three and six months ended March 31, 2017,June 30, 2019 and approximately $51,000 for the three months ended March 31, 2016.2018, respectively. Estimated amortization of purchased intangible assets over the next five years is as follows (in(unaudited)(in thousands):

2017 (nine months) $336 
2018  315 
2019  315 
2020  315 
2021  164 
Thereafter  86 
Total $1,531 

10.UNCOMPLETED CONSTRUCTION CONTRACTS

2019 (six months)$159
2020316
2021163
202284
2023—
Thereafter—
Total$722

13.    LEASES

Sale of Maine Facilities
On April 3, 2019, 947 Waterford Road, LLC (“947 Waterford,” a wholly-owned indirect subsidiary of Digirad) entered into a Purchase and Sale Agreement (the “Waterford Purchase Agreement”) with KBS, pursuant to which 947 Waterford purchased certain real property and related improvements (including buildings) located in Waterford, Maine (the “Waterford Facility”) from KBS (the “Waterford Transaction”), and acquired the Waterford Facility. The statusWaterford Purchase Agreement contains representations, warranties and covenants of uncompleted construction contractsKBS and 947 Waterford that are customary for a transaction of this nature. The purchase price of the Waterford Facility was $1.0 million.

947 Waterford is a wholly-owned indirect subsidiary of Digirad, formed for the purpose of acquiring and holding the Waterford Facility.
On April 3, 2019, 300 Park Street, LLC (“300 Park,” a wholly-owned indirect subsidiary of Digirad) entered into a Purchase and Sale Agreement (the “Park Purchase Agreement”) with KBS, pursuant to which 300 Park purchased certain real property and related improvements and personal property (including buildings, machinery and equipment) located in Paris, Maine (the “Park Facility”) from KBS (the “Park Transaction”), and acquired the Park Facility. The Park Purchase Agreement contains representations, warranties and covenants of KBS and 300 Park that are customary for a transaction of this nature. The purchase price of the Park Facility was $2.3 million.
On April 3, 2019, KBS entered into a separate lease agreement with each of 947 Waterford (the “Waterford Lease”) and 300 Park (the “Park Lease”). The Waterford Lease and Park Lease both have initial terms of 120 months, which are subject to extension.
On April 3, 2019, KBS entered into a lease agreement (the “Oxford Lease”) with 56 Mechanic Falls Road, LLC (“56 Mechanic,” a wholly-owned indirect subsidiary of Digirad), in connection with that certain real property and related improvements and personal property owned by RJF – Keiser Real Estate, LLC (“RJF”) (including buildings, fixtures, and other improvements on the land, and all machinery and equipment and other personal property, if any, owned by RJF and located on the property) located in Oxford, Maine (the “Oxford Premises”). The Oxford Lease was amended as of April 18, 2019 (the “Oxford Lease
ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Amendment”) to provide that the commencement date will be the later of the closing of the sale of the Oxford Premises (the "Oxford Transaction"), which occurred on March 27, 2019. The Oxford Lease has an initial term of 120 months, which is subject to extension. ATRM has unconditionally guaranteed the performance of all obligations under each of the Leases to be performed by KBS, including, without limitation, the payment of all required rent. The payment of rent has been waived by approximately six months at the inception of the lease.    
Lease Accounting Policy

In February 2016, the FASB issued ASU 2016-02, Leases, or ASU 2016-02, to enhance the transparency and comparability of financial reporting related to leasing arrangements. The Company adopted ASU 2016-02 on January 1, 2019, or the effective date, and used the effective date as its date of initial application.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the facts and circumstances present. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining fixed lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. In calculating the present value of future lease payments, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company has elected to utilize a single blended interest rate based on geographies and lease terms that comprise the lease portfolio.
Although separation of lease and non-lease components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and non-lease components. The Company has elected to account for the lease and non-lease components of each of its operating leases as a single lease component and allocate all of the contract consideration to the lease component only. The lease component results in an operating right-of-use asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense.
Many of the Company’s leases contain options to renew and extend lease terms and options to terminate leases early. The Company does not recognize the right-of-use asset or lease liability for renewal or termination periods unless the Company is reasonably certain to exercise the option at lease inception.
The Company has operating leases for real estate and non-real estate in Minnesota, Wisconsin and Maine. The Company has finance leases for some equipment that is immaterial.
The Company has lease arrangements with lease and non-lease components and has elected to account for the lease and non-lease component as a single lease component, and has allocated all of the contract consideration to the lease component only. The Company has existing net leases in which the non-lease components (e.g. common area maintenance, maintenance, consumables, etc.) are paid separately from rent based on actual costs incurred and therefore are not included in the right-of-use asset and lease liability and are reflected as an expense in the period incurred.
As of June 30, 2019, a right-of-use asset of $3.4 million and lease liability of $3.6 million are reflected on the balance sheet.
The elements of lease expense were as follows (dollars in thousands)(unaudited):
ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


  Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
Lease Cost    
Operating lease cost $185
 $253
Variable lease cost 83
 117
Total lease cost $268
 $370
     
Other Information    
Operating cash flows used for operating leases $66
 $133
Net gain recognized from sale and leaseback transactions (1)
 531
 531
     
Operating Leases    
Weighted average discount rate 10.0% 10.0%
Weighted average remaining lease term (years) 8.6
 8.6
(1) During the second quarter of 2019, the Company entered into sale leaseback transactions related to three properties, which resulted in total proceeds of $3.9 million.
Future lease payments under non-cancelable leases as of June 30, 2019 were as detailed below (in thousands)(unaudited):

  March 31, 2017  December 31, 2016 
  (Unaudited)    
       
Costs incurred on uncompleted contracts $9,899  $6,575 
Inventory purchased for specific contracts  780   837 
Estimated profit  1,667   1,150 
Subtotal  12,346   8,562 
Less billings to date  (12,293)  (8,169)
Total $53  $393 
         
Included in the following balance sheet captions:        
Costs and estimated profit in excess of billings $866  $1,045 
Billings in excess of costs and estimated profit  (813)  (652)
Total $53  $393 

The Company had approximately $10.4 million of work under contract remaining to be recognized at March 31, 2017.

9

11.ACCOUNTS PAYABLE RETAINAGE

Accounts payable of approximately $4.7 million at March 31, 2017, included retainage amounts due to subcontractors of approximately $0.2 million. Accounts payable of approximately $3.8 million at December 31, 2016 included retainage amounts due to subcontractors totaling approximately $0.4 million. Retainage balances at March 31, 2017, are expected to be settled within the next 12 months.

12.OTHER ACCRUED LIABILITIES

2019 (six months)$251
2020744
2021686
2022487
2023495
Beyond2,746
Total lease payments5,409
Less: imputed interest1,858
Total operating liabilities$3,551

14.     OTHER ACCRUED LIABILITIES

Other accrued liabilities are comprised of the following (in(unaudited)(in thousands):

  March 31, 2017  December 31, 2016 
  (Unaudited)    
       
Accrued interest expense $374  $637 
Accrued sales taxes  892   739 
Accrued health insurance costs  108   96 
Accrued sales rebates  213   327 
Accrued warranty  50   49 
Other  90   416 
Total other accrued liabilities $1,727  $2,264 

  June 30, 2019 December 31, 2018
Accrued taxes (1)
 $965
 $1,815
Accrued interest expense 804
 148
Accrued dividend payable 746
 449
Accrued sales rebates 85
 141
Accrued health insurance costs 67
 67
Accrued warranty 59
 56
Other 88
 181
Total other accrued liabilities $2,814
 $2,857

(1) Primarily includes accrued sales and use taxes.

ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Changes in accrued warranty are summarized below (in(unaudited)(in thousands):

  Three months ended March 31, 
  2017  2016 
  (unaudited)    
Accrual balance, beginning of period $       49  $39 
Accruals for warranties  1   29 
Settlements made  —   (29)
Accrual balance, end of period $50  $39 

13.NOTES PAYABLE

  Six Months Ended June 30,
  2019 2018
Accrual balance, beginning of period $56
 $50
Accruals for warranties 3
 3
Accrual balance, end of period $59
 $53

15.    NOTES PAYABLE
As of March 31, 2017,June 30, 2019, we had outstanding notes payablerevolving lines of credit of approximately $4.1$3.5 million. Our notes payable primarily included (i) $2.3$0.9 million principal outstanding on KBS’s $4.0 million revolving credit facility under the KBS Loan Agreement and (ii) $1.8$2.6 million principal outstanding on EBGL’s $3.0 million revolving credit facility under the EBGLPremier Loan Agreement.

10
Agreement, net of an immaterial amount of unamortized financing fees.

KBS Loan Agreement

The KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to $4.0 million. Availability under the line of credit is based on a formula tied to KBS’s eligible accounts receivable, inventory real estate and other collateral. The KBS Loan Agreement was scheduled to expire on February 22, 2018, but, under the terms of the agreement, was extended automatically for an additional one-year period ending on February 22, 2019. Under the terms of the agreement, the KBS Loan Agreement was extended automatically for an additional one-year period ending on February 22, 2020. The KBS Loan Agreement will extend again automatically for an additional one-year period unless a party provides prior written notice of termination. Upon the final expiration of the term of the KBS Loan Agreement, the outstanding principal balance is payable in full. Borrowings bear interest at the prime rate plus 2.75%, with interest payable monthly. The KBS Loan Agreement also provides for certain fees payable to Gerber Finance during its term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee. KBS’s obligations under the KBS Loan Agreement are secured by all of its property and assets and are guaranteed by ATRM. Unsecured promissory notes issued by KBS and ATRM are subordinate to KBS’s obligations under the KBS Loan Agreement. The KBS Loan Agreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. Financial covenants require that KBS maintain a maximum leverage ratio (as defined in the KBS Loan Agreement) and KBS not incur a net annual post-tax loss in any fiscal year during the term of the KBS Loan Agreement. At March 31, 2017,June 30, 2019, approximately $2.4$0.9 million was outstanding under the KBS Loan Agreement, which, after offset of approximately $0.1 millionan immaterial amount of unamortized deferred financing costs, is presented at a net amount of approximately $2.3$0.9 million on the Condensed Consolidated Balance Sheet.

 The parties to the Acquisition Loan Agreement have amended the Acquisition Loan Agreement to waive certain covenants and to make certain amendments in connection with the termination of the EBGL Loan Agreement and refinancing under the Premier Loan Agreement.

The parties to the KBS Loan Agreement have amended the KBS Loan Agreement to provide for increased availability under the KBS Loan Agreement to KBS under certain circumstances, including for new equipment additions, and certain other changes, as well as a waiver of certain covenants.

On September 29, 2017, the parties to both the KBS Loan Agreement and the Acquisition Loan Agreement amended the respective loan agreements in conjunction with the Exchange with Lone Star Value Investors, LP ("LSVI") and LSV Co-Invest I (see discussion below).

In connection with amending the KBS Loan Agreement, Jeffrey E. Eberwein, Chairman of the Board, executed a guaranty dated November 20, 2017 in favor of Gerber Finance unconditionally guaranteeing up to $0.5 million of KBS’s obligations under the KBS Loan Agreement arising from certain permitted over advances. On December 22, 2017, the Company also entered into a Fourth Agreement of Amendment to Loan and Security Agreement to amend the terms of the Acquisition Loan Agreement to reflect certain changes made to the KBS Loan Agreement.

Through a series of correspondence between KBS and Gerber Finance, on or about January 15, 2018, which the parties to the KBS Loan Agreement deemed to be the Seventh Agreement of Amendment to the Loan and Security Agreement, the parties clarified certain definitions in the KBS Loan Agreement.
ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



On October 1, 2018, the parties to the KBS Loan Agreement entered into an Eighth Agreement of Amendment to the Loan and Security Agreement to extend the availability of up to $0.6 million of over advances to KBS above the borrowing base in order to provide KBS with additional working capital. The overadvance was scheduled to be paid down by $75.0 thousand per week beginning January 4, 2019 in order to be fully repaid on or before February 23, 2019 to coincide with the expiration date of the line of credit. As the line was automatically renewed through February 23, 2020, Gerber Finance has subsequently agreed to begin the scheduled pay down of $75.0 thousand per week to begin on February 15, 2019 for eight weeks with final repayment scheduled for April 8, 2019. The $0.6 million overadvance was paid in full on April 3, 2019.

As of December 31, 2018 and 2017, KBS was not in compliance with the financial covenantcovenants requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of these test dates. Additionally, KBS was not in compliance with the next test date,requirement to deliver the Company's fiscal year-end financial statements reviewed by an independent certified accounting firm acceptable to Gerber Finance within 105 days from the fiscal year ended December 31, 2017. We have begun discussions with Gerber Finance as to obtaining a waiver for these events. Should the Company be unable to obtain a waiver from Gerber Finance, it would become an event of default. The occurrence of any event of default under the KBS Loan Agreement may result in KBS’s obligations under the KBS Loan Agreement becoming immediately due and payable.

In April 2019 and June 2019, we obtained a waiver from Gerber Finance for these events. In addition obtaining a waiver for these covenants, the Company and Gerber Finance agreed to eliminate the minimum leverage ratio covenant for fiscal years after 2018 (see Note 16). If the Company fails to comply with any financial covenants under our loan agreements with Gerber Finance going forward, Gerber Finance may demand the repayment of the credit facilities amount outstanding and any unpaid interest thereon.

Promissory Note Sale to Digirad

On December 14, 2018, the Company issued to Digirad an unsecured promissory note in the principal amount of $0.3 million in exchange for the same amount in cash (the “Digirad Note”). The Digirad Note bears interest at 10.0% per annum for the first 12 months of its term, and at 12.0% per annum for the remaining 12 months. All unpaid principal and interest under the Digirad Note is due on December 14, 2020. The Company may prepay the Digirad Note at any time after a specified amount of advance notice to Digirad (subject to certain restrictions under the Company’s existing loan agreements). The Digirad Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable.

EBGL Line of Credit

On October 4, 2016, concurrently with the EBGL Acquisition, the Company entered the EBGL Loan Agreement provideswith Gerber Finance providing EBGL with a revolving working capital line of credit of up to $3.0 million. Availability under the EBGL Loan Agreement iswas based on a formula tied to the borrowers’ eligible accounts receivable, inventory and equipment. The initial term of the EBGL Loan Agreement iswas set to expire on October 3, 2018, but extendsextended automatically for additional one-year periods unless a party provided prior written notice of termination. Borrowings bear interest at the prime rate plus 2.75%, with interest payable monthly and the outstanding principal balance iswas payable upon the expiration of the term of the EBGL Loan Agreement. Initially, availability under the EBGL Loan Agreement was limited to $1.0 million, which amount could be increased to up to $3.0 million in increments of $500,000$0.5 million upon the request of the borrowers and in the discretion of Gerber Finance. As of March 31, 2017, maximum availability was set at $2.0 million under the EBGL Loan Agreement. Obligations under the EBGL Loan Agreement were secured by all of the borrowers’ assets and were guaranteed by the Company and its other subsidiaries. The EBGL Loan Agreement containscontained representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. Financial covenants requirerequired that EBGL maintainsmaintained a minimum tangible net worth and a minimum debt service coverage ratio. As of March 31, 2017, the Company expected that it would be in compliance with these financial covenants at the next test date, December 31, 2017; however, as discussed in Note 19, the EBGL Loan Agreement was replaced by a new working capital line of credit with a new lender. At March 31, 2017, approximately $2.0 million was outstanding under the EBGL Loan Agreement, which, after offset of approximately $0.2 million of unamortized deferred financing costs, is presented at a net amount of approximately $1.8 million on the Condensed Consolidated Balance Sheet. As disclosed in Note 19, theThe Company refinanced the EBGL Loan Agreement through a new $3.0 million revolving working capital line of credit with Premier Bank on June 30, 2017.

11


14.LONG-TERM DEBT

On June 30, 2017, EBGL entered into the Premier Loan Agreement with Premier providing EBGL with a working capital line of credit of up to $3.0 million. The Premier Loan Agreement replaced the EBGL Loan Agreement with Gerber Finance, which was terminated on the same date. Availability under the Premier Loan Agreement is based on a formula tied to EBGL’s eligible accounts receivable, inventory and equipment, and borrowings bear interest at the prime rate plus 1.50%, with interest payable monthly and the outstanding principal balance payable upon expiration of the term of the Premier Loan Agreement. The Premier Loan Agreement also provides for certain fees payable to Premier during its term. The initial term of the Premier Loan Agreement was scheduled to expire on June 30, 2018, but was extended by Premier until February 1, 2019. In July 2019, the Premier Loan Agreement was extended further by Premier until October 1, 2019. The Premier Loan Agreement may be further extended from time to time at our request, subject to approval by Premier. EBGL’s obligations under the Premier Loan Agreement are secured by all of their inventory, equipment, accounts and other intangibles, fixtures and all proceeds of the foregoing.

As of December 31, 2017 and 2018, EBGL was not in compliance with the following covenants under the Premier Loan Agreement: (i) requirement to maintain a Debt Service Coverage Ratio for the calendar year of at least 1.0; and (ii) a requirement
ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


to deliver the Company's fiscal year-end audited financial statements within 120 days of the end of each calendar year. The occurrence of any event of default under the Premier Loan Agreement may result in EBGL’s obligations under the Premier Loan Agreement becoming immediately due and payable. In April 2019, we obtained a waiver from Premier for these events through October 1, 2019 (the current maturity date of the Premier Loan Agreement).

If the Company fails to comply with any financial covenants under our loan agreements with Gerber Finance or Premier going forward, the applicable lender(s) may demand the repayment of the credit facilities amount outstanding and any unpaid interest thereon.

The Premier Loan Agreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. The occurrence of any event of default under the Premier Loan Agreement may result in the obligations of EBGL becoming immediately due and payable.

As a condition to closing the Premier Loan Agreement, each of the Company and Jeffrey E. Eberwein, Chairman of the Company's Board, executed a guaranty, dated as of the same date, in favor of Premier, absolutely and unconditionally guaranteeing all of EBGL’s obligations under the Premier Loan Agreement.

In connection with EBGL’s entry into the Premier Loan Agreement, and on the same date, EBGL repaid in full all of their obligations under and terminated the EBGL Loan Agreement. Pursuant to the termination of the EBGL Loan Agreement, all obligations of the Company in favor of Gerber Finance in connection with the EBGL Loan Agreement were extinguished.


ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



16.    LONG-TERM DEBT

Long-term debt is comprised of the following (in(unaudited)(in thousands):

  March 31, 2017  December 31, 2016 
  (Unaudited)    
       
Promissory note payable to LSVI, a related party, unsecured, interest of 10% per annum (12% per annum PIK Interest) payable semi-annually in July and January, with any unpaid principal and interest due on April 1, 2019 $4,522  $4,261 
         
Promissory notes payable to LSV Co-Invest I, a related party, unsecured, interest of 10% per annum (12% per annum PIK Interest) payable semi-annually in July and January, with any unpaid principal and interest due on April 1, 2019  7,625   6,773 
         
Promissory note payable to KBS, sellers, unsecured, interest imputed at 9.5%, payable in monthly installments of $100,000 (principal and interest) through July 2017  392   678 
         
Software installment payment agreement, unsecured, interest at 8.0% per annum, payable in monthly installments of $1,199 through September 2020  43   46 
         
Notes payable, secured by equipment, interest at 6.6% to 9.5% per annum, with varying maturity dates through September 2018  16   22 
         
Promissory note payable to Gerber Finance, secured, interest at the current prime rate plus 3.0% payable monthly with any unpaid principal and interest due on December 31, 2018  3,000   3,000 
         
Revolving equipment credit line, unsecured  15   — 
         
Deferred payments to EBGL Sellers, secured, interest imputed at 10.0%, quarterly payments of principal and interest of $250,000 beginning April 1, 2017 through October 1, 2017; as disclosed in Note 19, the Company amended the terms of the deferred payments to EBGL Sellers on June 30, 2017  731   964 
         
Total long-term debt  16,344   15,744 
Current portion  (1,132)  (1,675)
Noncurrent portion $15,212  $14,069 

Under

  June 30, 2019 December 31, 2018
Promissory note payable to Gerber Finance, secured, interest at the current prime rate plus 3.0% payable monthly with any unpaid principal and interest due on December 31, 2019, supported by pledge agreement between LSVI and Gerber Finance of up to $3.0 million plus additional fees $3,000
 $3,000
Promissory note payable to LSV Co-Invest I (a Related Party), unsecured, interest of 10% per annum (12% per annum PIK interest) payable semi-annually in July and January, with any unpaid principal and interest due on January 12, 2020 909
 909
Promissory note payable to LSV Co-Invest I (a Related Party), unsecured, interest of 10% per annum (12% per annum PIK interest) payable semi-annually in July and January, with any unpaid principal and interest due on January 12, 2020 528
 528
Promissory note payable to LSVM proceeds of which are to be paid to Jeff Eberwein (a Related Party) based upon conditions set forth in the LSVM purchase agreement, unsecured, interest of 10.0% per annum (12% per annum PIK Interest) payable annually, with any unpaid principal and interest due on November 30, 2020 300
 —
Digirad (a Related Party) unsecured promissory note, interest at 10.0% per annum for the first 12 months of its term, and at 12.0% per annum for the remaining 12 months. All unpaid principal and interest under the Digirad Note is due on December 14, 2020 275
 275
Vehicle financing, interest at 5.9% per annum, due June 20, 2023

 72
 79
Vehicle financing, interest at 5.9% per annum, due April 11, 2024 87
 —
Equipment financing, interest at 10.0% per annum, due November 26, 2020 34
 —
EBGL computer equipment and software financing, secured by underlying assets, interest at 9.0% per annum, payable in monthly installments of $1,105 per month, through May 2022 16
 39
KBS software installment payment agreement, unsecured, interest at 8.0% per annum, payable in monthly installments of $1,199 through September 2020 38
 21
Revolving equipment credit line, unsecured 7
 10
Total long-term debt 5,266
 4,861
Current portion (3,093) (3,048)
Noncurrent portion $2,173
 $1,813

As of December 31, 2018, the Company was not in compliance with certain covenants with its Gerber promissory note totaling $3.0 million. These covenant breaches include:  debt service coverage ratio and timely reporting of financial statements.   The Company received a waiver, dated as of June 25, 2019, for these covenant breaches through December 31, 2018. 

Amendments to Gerber Finance Loan Agreements

On February 22, 2019, the Company entered into a Ninth Agreement of Amendment to Loan and Security Agreement (the “Ninth KBS Loan Amendment”) to amend the terms of the amended LSVI and LSV Co-Invest I promissory notes,KBS Loan Agreement to extend the availability of up to $0.6 million of over advances through no later than February 23, 2020 in order to provide KBS with additional working capital. The overadvance was paid in full in April 2019.

On April 1, 2019, the Company at its sole option, may elect to make any interest payment in PIK Interest at an effective rate of 12% per annum (versus the 10% interest rate applied to cash payments) for that period. The Company elected the PIK Interest option for its interest payments in 2016 and recorded approximately $1.1 million of PIK Interest as part of the principal balance of the LSVI and LSV Co-Invest I promissory notes at December 31, 2016 and March 31, 2017. Subsequently, the Company has elected the PIK Interest option for its interest payments in 2017.

12

On March 31, 2017, ATRM entered into an additional Securities Purchasea Tenth Agreement with LSV Co-Invest I. Pursuantof Amendment to this agreement, LSV Co-Invest I purchased for $0.5 million in cash, an unsecured promissory note dated March 31, 2017, made by ATRM in the principal amount of $0.5 million. The note bears interest at 10.0% per annum, with interest payable semiannually in JanuaryLoan and July; provided, however, LSV Co-Invest I may electSecurity Agreement (the “Tenth KBS Loan Amendment”) to receive any PIK Interest at an annual rate of 12.0%, so long as any such interest payment is made either (x) entirely in PIK Interest or (y) 50% cash and 50% PIK Interest. Except for the principal amount and the PIK Interest feature, the terms of this promissory note are identical toamend the terms of the previous LSVIKBS Loan Agreement, and LSV Co-Invest I promissory notes.

As discloseda Fifth Agreement of Amendment to Loan and Security Agreement (the “Fifth EBGL Loan Amendment”) to amend the terms of the Acquisition Loan Agreement. The Tenth KBS Loan Amendment and the Fifth EBGL Loan Amendment amended the terms of the KBS Loan Agreement and the Acquisition

ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Loan Agreement, respectively, to permit the Company’s acquisition of LSVM and to clarify the parties’ rights and duties in Note 19, subsequentconnection therewith, among other things.

In connection with each of the Ninth KBS Loan Amendment and the Tenth KBS Loan Amendment, Mr. Eberwein executed a reaffirmation of guaranty in favor of Gerber Finance relating to March 31, 2017,his unconditional guaranty of $0.6 million of KBS’s obligations under the KBS Loan Agreement arising from the $0.6 million of over advances permitted under the Ninth KBS Loan Amendment.

On April 15, 2019, the Company LSVI, and LSV Co-Invest I entered into an exchange agreement wherebyEleventh Agreement of Amendment to Loan and Security Agreement (the “Eleventh KBS Loan Amendment”) to amend the outstanding LSVI and LSV Co-Invest I promissory notes, along with accrued interest, were exchanged for 132,548 sharesterms of the Company’s 10.0% Series B Cumulative Preferred Stock.

The Company is partyKBS Loan Agreement to (i) provide for increased borrowing capability; (ii) to eliminate the Leverage Ratio financial covenant required by Schedule III (Financial Covenants); and (iii) to amend the Net Loss covenant required by Schedule III (Financial Covenants). In addition, the Eleventh KBS Loan Amendment provided a Registration Rights Agreementwaiver for certain covenants for the 2017 and 2018 fiscal years. In connection with LSVI, providing LSVI with certain demandthe Eleventh KBS Loan Amendment, Mr. Eberwein executed a reaffirmation of agreements in favor of Gerber Finance relating to his unconditional guaranty as described above and piggyback registration rights, effective at any time after July 30, 2014, with respectother documents related to the 107,297 shares of our common stock issued upon the conversion of a convertible promissory note held by LSVI in 2014.

As of March 31, 2017, LSVI owned 1,067,885 shares of our common stock, or approximately 45.1% of our outstanding shares, including 900,000 shares purchased in a common stock rights offering we completed in September 2015. Jeffrey E. Eberwein, ATRM’s Chairman of the Board, is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and the sole member of LSVM, the investment manager of LSVI.

ATRM’s entry into the securities purchase agreements with LSVI and LSV Co-Invest I was approved by a Special Committee of our Board consisting solely of independent directors.

15.STOCK INCENTIVE PLAN AND SHARE-BASED COMPENSATION

KBS.




ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



17.    STOCK INCENTIVE PLAN AND SHARE-BASED COMPENSATION

ATRM uses the fair value method to measure and recognize share-based compensation. We determine the fair value of stock options on the grant date using the Black-Scholes option valuation model. We determine the fair value of restricted stock awards based on the quoted market price of our common stock on the grant date. We recognize the compensation expense for stock options and restricted stock awards on a straight-line basis over the vesting period of the applicable awards.


2014 Incentive Plan


The Company has a stock incentive plan that was approved by the Board and became effective on December 4, 2014 (the “2014 Plan”) upon approval by shareholders. The 2014 Plan is administered by the Compensation Committee of the Board. The purpose of the 2014 Plan is to provide employees, consultants and Board members the opportunity to acquire an equity interest in the Company through the issuance of various stock-based awards such as stock options and restricted stock.

Under the 2014 Plan, prior to January 1, 2016, 60,000

On December 18, 2017, ATRM granted 70,000 restricted shares of the Company’sCompany's common stock were granted to its directors and its then Chief Financial Officer. The shares vested one year after the grant date and the fair value of the awards was determined to be $4.48 per share, the closing price of our common stock on the grant date. Compensation expense related to these grants amounted to approximately $67,000 for the three months ended March 31, 2016 and is included in the caption “Selling, general and administrative expenses” in our Condensed Consolidated Statement of Operations.

13

On October 19, 2016, ATRM granted 30,000 restricted shares of the Company’s common stock to its Chief Executive Officer, Chief Financial Officer and former Chief Financial Officer (10,000 shares each). The shares vest one year after the grant date and the fair value of the awards was determined to be $2.25$1.18 per share, the closing price of our common stock on the grant date. Compensation expense related to these grants amountedamount to approximately $17,000$20.6 thousand for the three and $41.0 thousand for the six months ended March 31, 2017,June 30, 2018, respectively, and is included in the caption “Selling,"Selling, general and administrative expenses”expenses" in our Condensed Consolidated Statement of Operations. The remaining compensation expense was recognized in full in 2018. 

On December 12, 2018, ATRM granted 70,000 shares of the Company's common stock to its directors, its Chief Executive Officer and Chief Financial Officer (10,000 shares each) and granted an additional 40,000 shares of the Company's common stock to each member of the Board of Director's Special Committee (10,000 shares each). The shares vest one year after the grant date and the fair value of the awards was determined to be $0.20 per share, the closing price of our common stock on the grant date. Compensation expense related to these grants was $5.5 thousand and $10.9 thousand for the three and six months ended June 30, 2019, respectively, and is included in the caption "Selling, general and administrative expenses" in our Condensed Consolidated Statement of Operations. The remaining compensation expense of approximately $37,000 has been$10.4 thousand will be recognized on a straight-line basis through October 19, 2017.

2003 Stock Incentive Plan

A stock incentive plan approved by our shareholders and adopted in May 2003 (the “2003 Plan”) terminated in February 2013. Stock options granted under the 2003 Plan continueDecember 12, 2019, subject to be exercisable according to their individual terms. The following table summarizes stock option activity under the 2003 Plan for the three months ended March 31, 2017:

  Number
of Shares		  Weighted Average Exercise Price  Weighted Average Remaining Contract Term  Aggregate
Intrinsic
Value (in thousands)		 
Outstanding, January 1, 2017  27,500  $6.88         
Options expired during the three months ended March 31, 2017  (16,200) $7.75         
Outstanding, March 31, 2017  11,300  $5.64   0.62 years  $0 
                 
Exercisable, March 31, 2017  11,300  $5.64   0.62 years  $0 

All stock options outstandingat March 31, 2017, are nonqualified options, all of which expired unexercised at varying dates through November 2017. The aggregate intrinsic values in the table above are zero because the option exercise prices for all outstanding options exceeded ATRM’s closing stock price onMarch 31, 2017.

16.INCOME TAXES

forfeitures.

18.    INCOME TAXES

We record the benefit we will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets.” We record a valuation allowance to reduce the carrying value of our net deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Since 2009, we have maintained a valuation allowance to fully reserve our deferred tax assets. We recorded a full valuation allowance in 2009 because we determined there was not sufficient positive evidence regarding our potential for future profits to outweigh the negative evidence of our three-year cumulative loss position at that time. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.

At March 31, 2017,

As of June 30, 2019, we have recorded a net deferred tax liability of $20,700$10.0 thousand for the taxable differences related to our indefinite-lived intangible assets when calculating our valuation allowance due to the unpredictability of the reversal of these differences.

14

17.LEGAL PROCEEDINGS

The Company is and may become involved in various lawsuits as well as other certain legal proceedings that arise in the ordinary course of business. Information regarding certain material proceedings is provided below.

UTHE Technology Corporation v. Aetrium Incorporated

Since December 1993, an action brought by UTHE Technology Corporation (“UTHE”) against ATRM and its then sales manager for Southeast Asia (“Sales Manager”), asserting federal securities claims, a RICO claim, and certain state law claims, had been stayed in the United States District Court for the Northern District of California. UTHE’s claims were based on its allegations that four former employees of a Singapore company, which UTHE formerly owned, conspired to and did divert business from the subsidiary, and in turn UTHE, and directed that business to themselves and a secret company they had formed, which forced UTHE to sell its subsidiary shares to the former employee defendants at a distressed price. The complaint alleged that ATRM and the Sales Manager participated in the conspiracy carried out by the former employee defendants. In December 1993, the case was dismissed as to the former employee defendants because of a contract requiring UTHE and them to arbitrate their claims in Singapore. The district court stayed the case against ATRM and the Sales Manager pending the resolution of arbitration in Singapore involving UTHE and three of the former employee defendants, but not involving ATRM or the Sales Manager. ATRM received notice in March 2012 that awards were made in the Singapore arbitration against one or more of the former employee defendants who were parties to the arbitration. In June 2012, UTHE filed a motion to reopen the case against ATRM and the Sales Manager and to lift the stay, which the court granted. On September 13, 2013, the court entered final judgment dismissing all remaining claims UTHE asserted against ATRM in the litigation. On September 23, 2013, UTHE appealed the district court judgment to the United States Court of Appeal for the Ninth Circuit only as to the dismissal of UTHE’s RICO claim. The appeal was argued in a court hearing on November 19, 2015. On December 11, 2015, the court of appeal issued an order reversing the district court’s grant of summary judgment of UTHE’s RICO claim and remanded the case back to the district court for further proceedings. On April 20, 2016, the district court stayed the case pending a decision in the Supreme Court caseRJR Nabisco, Inc. v. The European Community, No. 15-138. A decision in theRJR Nabisco case was issued on June 20, 2016. On July 14, 2016, ATRM filed a motion for summary judgment in the district court seeking dismissal in light of theRJR Nabiscodecision. On August 26, 2016, the district court granted ATRM’s motion for summary judgment and dismissed the case. On September 19, 2016, UTHE filed its appeal to the Ninth Circuit of the district court’s grant of summary judgment and dismissal. The parties completed the appellate briefing on February 13, 2017. Oral arguments were held by the appellate court on February 14, 2018. The court is expected to render its decision on the appeal within 90 days. We continue to believe that the claims asserted in this matter do not have any merit and intend to vigorously defend the action.

KBE Building Corporation v. KBS Builders, Inc., and ATRM Holdings, Inc., et al.

At the time of the KBS acquisition in April 2014, KBS purchased receivables for a construction project known as the Nelton Court Housing Project (“Nelton Court”) in Hartford, CT, and also performed certain “punch-list” and warranty work. Modular units for Nelton Court were supplied by KBS Building Systems, Inc. (“KBS-BSI”) pursuant to a contract with KBE Building Corporation (“KBE”). KBE has asserted claims against KBS-BSI, KBS and ATRM arising out of alleged delays, and for the repair of certain alleged defects in the modular units supplied to the project. KBE’s claim seeks an unspecified amount of damages. The action has been transferred to the complex litigation docket of the Hartford Superior Court. The Hartford Superior Court has set a trial date for February 2018, but that date will likely be continued because all of the parties have participated in mediation and settlement negotiations are ongoing, so no depositions have yet been conducted. On December 18, 2017, KBS was notified that a global settlement had been reached between all defendants and the plaintiff. Under the settlement, KBS’s insurance carriers have agreed to pay $300,000 to the plaintiff.



19.    LEGAL PROCEEDINGS

From time to time, in the ordinary course of ATRM’s business, itthe Company is party to various other disputes, claims and legal proceedings. In the opinion of management, based on information available at this time, such disputes, claims and proceedings will not have a material effect on ATRM’s condensed consolidated financial statements.

15

18.OPERATING SEGMENTS

Prior to the EBGL Acquisition in October 2016, the Company’s operating results reflected the operating results of KBS, along with certain corporate overhead and corporate borrowing activity. Since the EBGL Acquisition, the



ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


20.    OPERATING SEGMENTS

The Company manages and organizes its business in twothree distinct reportable segments: (i) modular building manufacturing, and (ii) structural wall panel and wood foundation manufacturing, including building supply retail operations.operations, and (iii) investment advising services. The modular building manufacturing segment, through KBS, manufactures modular buildings for both single-family residential homes and larger, commercial building projects. The structural wall panel and wood foundation manufacturing segment (which also includes the building supply retail operations) manufactures structural wall panels for both residential and commercial projects as well as permanent wood foundation systems for residential homes, through the EdgeBuilder subsidiary, in addition to operating a local building supply retail operation, through the Glenbrook subsidiary. The investment advisory segment, through LSVM, provides services that include investment advisory services, servicing pooled investment vehicles as well as other specialty investment portfolios. The Company also has corporate level activities and expenditures which are not considered a reportable segment.


Each segments’ accounting policies are the same as those described in the summary of significant accounting policies, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018. There are no intersegment sales.

The Company’s reportable business segments are strategic business units that offer different products and services. Each segment is managed separately because they have different manufacturing processes and market to different customer bases, in geographically different markets.

The following table presents certain financial information regarding each reportable segment as of and for the three months ended March 31, 2017 (in(unaudited)(in thousands):

  Modular Home Manufacturing  Structural Wall Panel Manufacturing  Total 
          
Segment net sales $5,608  $3,796  $9,404 
Depreciation and amortization expense  123   156   279 
Interest expense, net  85   129   214 
Segment net income (loss)  35   (279)  (244)
Total segment assets  7,867   8,463   16,330 
Expenditures for segment assets  19   23   42 

  
Modular Home
Manufacturing
 
Structural Wall
Panel
Manufacturing
 Investment Advising Total
Three Months Ended June 30, 2019 2018 2019 2018 2019 2018 2019 2018
Segment net sales $2,894
 $4,942
 $3,971
 $5,533
 $50
 $873
 $6,915
 $11,348
Depreciation and amortization expense 51
 132
 60
 50
 —
 —
 111
 182
Interest expense (income), net 66
 84
 125
 130
 —
 —
 191
 214
Segment net income 159
 65
 159
 104
 (77) 330
 241
 499
Total segment assets 4,813
 7,586
 3,812
 5,876
 41
 987
 8,666
 14,449
Expenditures for segment assets —
 —
 117
 101
 —
 —
 117
 101

  
Modular Home
Manufacturing
 
Structural Wall
Panel
Manufacturing
 Investment Advising Total
Six Months Ended June 30, 2019 2018 2019 2018 2019 2018 2019 2018
Segment net sales $5,272
 $9,791
 $8,929
 $8,368
 $83
 $913
 $14,284
 $19,072
Depreciation and amortization expense 186
 264
 115
 98
 —
 —
 301
 362
Interest expense (income), net 142
 174
 250
 264
 —
 —
 392
 438
Segment net (loss) income (639) (219) 546
 (177) (180) 140
 (273) (256)
Total segment assets 4,813
 7,586
 3,812
 5,876
 41
 987
 8,666
 14,449
Expenditures for segment assets —
 12
 176
 106
 —
 —
 176
 118

Reconciliation of Segment Information (unaudited)(in thousands)

The following table presents the reconciliation of revenues (in thousands)

Revenues   
Total net sales for reportable segments $9,404 
Other net sales  — 
Consolidated net sales $9,404 
Net loss    
Total net loss for reportable segments $244 
Other net sales  — 
Unallocated amounts:    
Other corporate expenses  477 
Interest expense  349 
Change in fair value of contingent earn-out receivable  (213)
Provision for income taxes  4 
Consolidated net loss $861 
Assets    
Total assets for reportable segments $16,330 
Other assets  1,524 
Consolidated assets $17,854 

16
:


Other Significant Adjustments Segment Totals  Adjustments  Consolidated Totals 
          
Depreciation and amortization expense $280  $—  $280 
Interest expense $214  $349  $563 

Three Months Ended June 30,2019 2018
Total net sales for reportable segments$6,915
 $11,348
Consolidated net sales$6,915
 $11,348
ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Six Months Ended June 30,2019 2018
Total net sales for reportable segments$14,284
 $19,072
Consolidated net sales$14,284
 $19,072

The adjustment tofollowing table presents the reconciliation of net loss (unaudited)(in thousands):

Three Months Ended June 30,2019 2018
Total net income for reportable segments$241
 $499
Unallocated amounts: 
  
Other corporate expenses(649) (331)
Interest expense(62) (24)
Change in fair value of contingent earn-out—
 2
Provision for income taxes(11) (11)
Consolidated net (loss) income$(481) $135

Six Months Ended June 30,2019 2018
Total net loss for reportable segments$(273) $(256)
Unallocated amounts: 
  
Other corporate expenses(954) (761)
Interest expense(124) (37)
Change in fair value of contingent earn-out—
 4
Provision for income taxes(14) (15)
Consolidated net loss$(1,365) $(1,065)


The following table presents the reconciliation of assets (unaudited)(in thousands):

 June 30, December 31,
 2019 2018
Total assets for reportable segments8,666
 $11,051
Other assets1,024
 656
Consolidated assets$9,690
 $11,707

The following table presents the reconciliation other significant adjustments (unaudited)(in thousands):
  Segment Totals Unallocated Amount 
Consolidated
Totals
Three Months Ended June 30, 2019 2018 2019 2018 2019 2018
Depreciation and amortization expense $111
 $182
 $—
 $—
 $111
 $182
Interest expense 191
 214
 63
 24
 254
 238

  Segment Totals Unallocated Amount 
Consolidated
Totals
Six Months Ended June 30, 2019 2018 2019 2018 2019 2018
Depreciation and amortization expense $301
 $362
 $—
 $—
 $301
 $362
Interest expense 392
 438
 125
 37
 517
 475


ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The unallocated amounts of interest expense is the amount of interest incurred by the Company at the parent level, but not allocated to the operating segments. The other adjustments reflect amounts incurred at the parent not allocated to the operating segments. None of the other adjustments are considered significant.



21.    SUBSEQUENT EVENTS

LSV Co-Invest I and LSVM Waivers

19.
SUBSEQUENT EVENTS

EBGL Line of Credit

On June 30, 2017, EBGLJuly 17, 2019, ATRM entered into a Revolving Credit Loan Agreement (the “Premier Loan Agreement”)two waivers with Premier Bank (“Premier”) providing EBGLLSV Co-Invest I and one waiver with a working capital line of credit of upLSVM, pursuant to $3.0 million. The Premier Loan Agreement replacedwhich the EBGL Loan Agreement with Gerber Finance, which was terminated onparties thereto agreed (i) that the same date. Availability under the Premier Loan Agreement is based on a formula tied to EBGL’s eligible accounts receivable, inventory and equipment, and borrowings bear interest at the prime rate plus 1.50%, with interest payable monthly and the outstanding principal balance payable upon expirationclosing of the term of the Premier Loan Agreement. The Premier Loan Agreement also provides for certain fees payable to Premier during its term. The initial term of the Premier Loan Agreement expires on June 30, 2018, but may be extended from time to time at our request, subject to approval by Premier. EBGL’s obligations under the Premier Loan Agreement are secured by all of their inventory, equipment, accounts and other intangibles, fixtures and all proceeds of the foregoing.

The Premier Loan Agreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. The occurrence of anyMerger would not constitute an event of default under the Premier Loan Agreement may result interms of two promissory notes issued by ATRM to LSV Co-Invest I on January 12, 2018 and June 1, 2018 for the obligationsprincipal amounts of EBGL becoming immediately due$0.5 million and payable.

As a condition to closing the Premier Loan Agreement, each of the Company and Jeffrey E. Eberwein, a director of the Company, executed a guaranty, dated as of the same date, in favor of Premier, absolutely and unconditionally guaranteeing all of EBGL’s obligations$0.9 million, respectively, or under the Premier Loan Agreement.

In connection with EBGL’s entry into the Premier Loan Agreement, and on the same date, EBGL repaid in full all of their obligations under and terminated the EBGL Loan Agreement. Pursuant to the termination of the EBGL Loan Agreement, all obligations of the Company in favor of Gerber Finance in connection with the EBGL Loan Agreement were extinguished.

Amended Asset Purchase Agreement

On June 30, 2017, the Company and the EBGL Sellers agreed to amend that certain Asset Purchase Agreement, dated as of October 4, 2016 (as amended, the “EBGL Asset Purchase Agreement”). Under the terms of this amendment, EBGL’s obligationsa promissory note issued by ATRM to pay certain deferred paymentsLSVM on December 17, 2018 for the principal amount of $0.3 million, (ii) that neither LSV Co-Invest I nor LSVM would be entitled to the EBGL Sellers ($0.75 million) and the contingent earn-outaccelerate any payment ($1.0 million) were replaced with set monthly payments totaling $1.8 million, payable with an initial $0.2 million payment made on or about July 3, 2017, and 16 monthly installments of $0.1 million beginning August 1, 2017, and ending on November 1, 2018.

17

Amendments to Gerber Finance Loan Agreements

On June 30, 2017, the parties to the KBS Loan Agreement entered into a Third Agreement of Amendment to Loan and Security Agreement providing for increased availability under the KBS Loan Agreement to KBS under certain circumstances, and certain other changes, as wellsuch notes as a waiverresult of certain covenants.

On June 30, 2017, the Company entered into a Second Agreementclosing of Amendment to Loanthe Merger and Security Agreement(iii) upon the closing of the Merger, ATRM would be permitted to amend the Acquisition Loan Agreement to waive certain covenants and to make certain amendmentsits governing documents in connectionaccordance with the termination of the EBGL Loan Agreement and refinancing under the Premier Loan Agreement.

On July 20, 2017, the parties to the KBS Loan Agreement entered into a Fourth Agreement of Amendment to Loan and Security Agreement providing for increased availability under the KBS Loan Agreement to KBS for new equipment additions, as well as a waiver for certain covenants.

On September 29, 2017, the parties to the KBS Loan Agreement entered into a Fifth Agreement of Amendment to Loan and Security Agreement and the parties to the Acquisition Loan Agreement entered into a Third Agreement of Amendment to Loan and Security Agreement in conjunction with the Exchange with LSVI and LSV Co-Invest (see discussion below).

On December 22, 2017, the parties to the KBS Loan Agreement entered into a Sixth Agreement of Amendment to Loan and Security Agreement providing for increased availability under the KBS Loan Agreement to KBS under certain circumstances, and certain other changes. In connection with this amendment to the KBS Loan Agreement, Jeffrey E. Eberwein, a director of the Company, executed a guaranty dated November 20, 2017 in favor of Gerber Finance unconditionally guaranteeing up to $500,000 of KBS’s obligations under the KBS Loan Agreement arising from certain permitted overadvances. On December 22, 2017, the Company also entered into a Fourth Agreement of Amendment to Loan and Security Agreement to amend the terms of the Acquisition Loan Agreement to reflect certain changes made to the KBS LoanMerger Agreement.

Series B Preferred Stock ExchangeDividend Agreement

On September 29, 2017, the Company,July 16, 2019, ATRM, LSVI and LSV Co-Invest I (each a “Holder” and collectively, the “Holders”) entered into an Exchangea Series B Preferred Stock Dividend Agreement, dated as of the same dateDividend Agreement (the “Exchange“Dividend Agreement”), pursuant to which the Company issued to LSVI and LSV Co-Invest Ithe Holders a total of 132,54817,914.2 shares of a new class of 10.00% Series B Cumulative Preferred Stock, par value $0.001 per share (the “Series B“Preferred Stock”), of the Company. The Company previously issued shares of Series B Preferred Stock to the Holders. Dividends on those shares have accrued through December 31, 2018 but have not been paid. Pursuant to the Dividend Agreement, the Company and the Holders have agreed that the Preferred Stock will be issued in exchange for the returnlieu of payment and cancellationin full satisfaction of allsuch accrued dividends.
Restricted Stock Forfeitures

On July 9, 2019, 50,000 shares of the unsecured promissory notesCompany's common stock, $0.001 par value per share, were removed from the accounts of certain directors and an officer of the Company (the “Notes”) heldas they had terminated their service with the Board or the Company.

Agreement and Plan of Merger

On July 3, 2019, the Company entered into the Merger Agreement with Digirad, and Merger Sub, providing for the merger of Merger Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Digirad.  The Merger Agreement was approved unanimously by LSVIthe Board, following recommendation by a special committee of independent and LSV Co-Invest I (the “Exchange”). The Notes had an aggregate of $13.3 million unpaid principal and accrued and unpaid interest outstanding atdisinterested directors.

At the effective time of their cancellation. The material termsthe Merger, each share of Company common stock issued and outstanding immediately prior to the effective time (other than Excluded Shares) will be canceled and converted automatically into the right to receive 0.03 shares of Series A Preferred Stock.

Consummation of the Merger is subject to various closing conditions, including (i) approval by the Company’s shareholders, (ii)  the absence of any order, injunction, statute, rule, regulation or decree prohibiting, precluding, restraining, enjoining or making illegal the consummation of the Merger, (iii) the accuracy of the representations and warranties of each party (including there not having occurred a material adverse effect), (iv) performance, in all material respects, of all obligations and compliance with, in all material respects, agreements and covenants to be performed or complied with by each party, (v) declaration of effectiveness of the Registration Statement on Form S-4 filed by Digirad, (vi) the completion of a $3.0 million private placement of Series BA Preferred Stock are describedby the Digirad and (vii) the execution of an agreement by and between the Digirad and Jeffrey Eberwein, the Chairman of the Company’s Board, pursuant to which Digirad shall have the right to require Mr. Eberwein to acquire 100,000 shares of Series A Preferred Stock at a price of $10 per share for aggregate proceeds of $1.0 million at any time, in Digirad’s discretion, during the 12 calendar months following the effective time of the Merger.  If the Merger is not consummated by November 30, 2019, either party has the right to terminate the Merger Agreement, subject to certain conditions.

The Company makes various representations, warranties and covenants in the Merger Agreement, including covenants regarding: (i) the conduct of the business of the Company prior to the consummation of the Merger, (ii) the calling and holding of a meeting of the Company’s Current Reportshareholders to seek approval and (iii) the use of reasonable efforts to cause the Merger to be consummated.

ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Under the Merger Agreement, the Company is subject to a “no-shop” restriction on Form 8-K filedits ability to solicit offers or proposals relating to an alternative acquisition proposal or to provide information to or engage in discussions or negotiations with third parties regarding an alternative acquisition proposal. Until adoption of the Merger Agreement by the Company’s shareholders, the Company may only furnish information to, and engage in discussions and negotiations with, third parties making unsolicited acquisition proposals that the Board determines are reasonably likely to lead to a superior proposal and to terminate the Merger Agreement to accept a superior proposal.  The Merger Agreement provides Digirad certain rights to negotiate adjustments to the terms and conditions of the Merger Agreement upon a superior proposal.  The “no-shop” provision also includes a “fiduciary-out,” which permits the Board to change its recommendation that shareholders vote in favor of the Merger if the Board concludes that a change is advisable to comply with its fiduciary duties under applicable law.  The Merger Agreement also provides Digirad with certain rights to negotiate adjustments to the terms and conditions of the Merger Agreement in order to avoid such change in Board recommendation.

The Merger Agreement allows the Company and Digirad to terminate the Merger Agreement under certain circumstances.  Digirad may terminate if: (i) the Board changes its recommendation to shareholders to vote in favor of the transaction in accordance with the SECMerger Agreement, (ii) the Company breaches the Merger Agreement, or (iii) if the Company enters into an acquisition agreement with a third party following the receipt of a superior proposal. The Company may terminate if it enters into an acquisition agreement with a third party following the receipt of a superior proposal or if Digirad breaches the Merger Agreement.  Upon termination of the Merger Agreement under specified circumstances (including upon acceptance of a superior proposal or a change in recommendation under the “fiduciary out”), the Company must pay Digirad a termination fee of $0.7 million and reimburse Digirad for documented out-of-pocket expenses up to $0.2 million.

In addition, on October 4, 2017.

On September 29, 2017,May 15, 2019, Digirad and ATRM entered into an Agreement which provides that, in the event the Merger does not close on or prior to December 31, 2019, ATRM will reimburse Digirad of certain consulting and related fees paid by Digirad on behalf of ATRM. We anticipate the Merger to close in the third quarter of 2019; however there can be no assurance regarding timing of completion of regulatory approvals, which could delay timing of the closing and the Merger would remain subject to the satisfaction of customary closing conditions including the passing vote of the Company's shareholders.


The representations, warranties and covenants of the Company contained in the Merger Agreement (i) have been made only for purposes of the Merger Agreement; (ii) have been qualified by (a) matters specifically disclosed in any reports filed by the Company with the Securities and Exchange Commission (the “SEC”) and (b) confidential disclosures made to Digirad and Merger Sub in connection with the Exchange,Merger Agreement; (iii) are subject to materiality qualifications contained in the Company entered into a Registration RightsMerger Agreement datedthat may differ from what may be viewed as “material” by investors; (iv) are made only as of the same date (the “Registration Rights Agreement”), with LSVI and LSV Co-Invest I. The Registration Rights Agreement provides that at any time after October 15, 2018, upon the written request of the holders of at least 66 2/3%Merger Agreement and as of the shares of Series B Stock issueddate the Merger closes, or such other date as is specified in the Exchange that qualifyMerger Agreement; and (v) have been included in the Merger Agreement for the purpose of allocating risk between the contracting parties rather than establishing matters as registrable securities as defined therein,facts. Accordingly, the Merger Agreement is included with this filing to provide investors with information regarding the terms of the Merger Agreement, and not to provide investors with any other factual information regarding the Company will prepareor its business. Investors should not rely on the representations, warranties or covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company or any of its affiliates. Moreover, information concerning the subject matter of the representations and filewarranties may change after the date of the Merger Agreement, which subsequent information may or may not be reflected fully or at all in the Company’s public disclosures. The Merger Agreement should not be read alone, but must be read in conjunction with the SEC a registration statement coveringother information regarding the resaleCompany that is or will be contained in, or incorporated by reference into, the annual, quarterly and current reports, proxy statements and other documents that the Company files or has filed with the SEC.

As of those shares by their holders.

AtAugust 14, 2019, Jeffrey E. Eberwein, the time of the Exchange, LSVI also owned 1,067,885 sharesChairman of the Company’s Board, owns approximately 17.4% of the outstanding common stock of ATRM. Mr. Eberwein also is the Chairman of the Board of Digirad and beneficially owns 88,166 shares of Digirad's common stock, or approximately 45%4.3% of the shares outstanding. Additionally, 10,000 sharesMr. Eberwein is also the Chief Executive Officer of the Company’s common stock were held in an account managed by LSVM, an affiliate of LSVI and LSV Co-Invest I. Jeffrey E. Eberwein, Chairman of the Board,which is the investment manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and LSVI owns 222,577 shares of the sole memberCompany’s Series B Stock and another 374,562 shares of LSVM, the investment manager of LSVI,Series B Stock are owned directly by LSV Co-Invest I. Through these relationships and thereforeother relationships with affiliated entities, Mr. Eberwein may be deemed to beneficially ownthe beneficial owner of the securities owned by LSVI and the securities held in the account managed by LSVM. The termsLSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of the Exchange Agreement and the Series B Stock, were negotiated and approved by a special committeeexcept to the extent of his pecuniary interest therein. LSV Co-Invest I also holds unsecured promissory notes of the Board consisting solelyCompany in the principal amount totaling $1.4 million, the LSV Co-Invest I Notes Payable, and LSVM holds an unsecured note with a principal amount totaling $0.3 million proceeds of disinterestedwhich are to be paid to Mr. Eberwein based upon conditions set forth in the LSVM purchase agreement, the LSVM Note. In addition, LSVI has pledged up to $3.0 million plus additional fees as collateral for a current debt of ATRM.


Voting and independent directors.

18
Support Agreement

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



On September 29, 2017,July 3, 2019, in connection with the Exchange, the CompanyMerger Agreement, Digirad entered into amendments to its two Loana voting and Security Agreements (as amended, the “Loan Agreements”support agreement (the “Voting Agreement”) with Gerber Finance to permitall of the Exchange andholders of the Company’s paymentpreferred stock and approximately 17.4% of dividends on the Series B Stock in-kind, by the issuance of additional shares of Series B Stock, in accordance withCompany’s common stock. The Company has been advised that under the terms of the Series B Stock (as described below). UnderVoting Agreement, each of the Loan Agreements,referenced shareholders agreed, among other things, to vote, and irrevocably appointed Digirad as its proxy to vote, all of their shares in favor of the Company is not permitted to pay dividendsapproval of the Merger and adoption of the Merger Agreement.  The Voting Agreement terminates on the Series B Stock in cash withoutearlier of (a) the consent of Gerber Finance. Additionally, in connection with the Exchange, the subordination agreements by and among the Company, LSVI, LSV Co-Invest I and Gerber Finance, providing for the subordinationeffective date of the Company’s obligations underMerger and (b) the Notes to its obligations to Gerber Finance, were terminated.

Charter Amendments

At the Company’s 2017 Annual Meeting of Shareholders held on December 4, 2017, shareholders approved amendments to its Amended and Restated Articles of Incorporation (the “Existing Charter”) to:

(i)increase the number of authorized shares of the Company’s capital stock from 3,200,000 to 10,000,000, and make corresponding changes to the number of authorized shares of the Company’s common stock and preferred stock;
(ii)effect a 4-for-1 forward stock split of the Series B Stock; and
(iii)effect an extension to December 5, 2020 of the provisions of the Existing Charter designed to protect the tax benefits of the Company’s net operating loss carryforwards by generally restricting any direct or indirect transfers of the Company’s common stock that increase the direct or indirect ownership of the Company’s common stock by any Person (as defined in the Existing Charter) from less than 4.99% to 4.99% or more of the Company’s common stock, or increase the percentage of the Company’s common stock owned directly or indirectly by a Person owning or deemed to own 4.99% or more of the Company’s common stock (the “Extended Protective Amendment”).

On December 4, 2017, the Company filed Articles of Amendment with the Officetermination of the Secretary of State of the State of Minnesota to effect these amendments.

Promissory Note Sale to LSV Co-Invest IMerger Agreement.

On January 12, 2018, the Company issued to LSV Co-Invest I an unsecured promissory note in the principal amount of $0.5 million in exchange for the same amount in cash (the “LSV Co-Invest I Note”). The LSV Co-Invest I Note was issued pursuant to a securities purchase agreement by and between the Company and LSV Co-Invest I dated as of the same date. The LSV Co-Invest I Note bears interest at 10.0% per annum, with interest payable semiannually; provided, however, LSV Co-Invest I may elect to receive any interest as PIK Interest at an annual rate of 12.0%, so long as any such interest payment is made either (x) entirely in PIK Interest or (y) 50% cash and 50% PIK Interest. Any unpaid principal and interest under the LSV Co-Invest I Note is due on January 12, 2020. The Company may prepay the LSV Co-Invest I Note at any time after a specified amount of advance notice to LSV Co-Invest I (subject to certain restrictions under the Company’s existing loan agreements). The LSV Co-Invest I Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable.

As of January 12, 2018, LSVI owned 1,067,885 shares of our common stock, or approximately 45.1% of our outstanding shares, including 900,000 shares purchased in a common stock rights offering we completed in September 2015. Jeffrey E. Eberwein, ATRM’s Chairman of the Board, is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and the sole member of LSVM, the investment manager of LSVI. ATRM’s entry into the securities purchase agreement with LSV Co-Invest I was approved by a Special Committee of our Board consisting solely of independent directors.

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ATRM HOLDINGS, INC.


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our unaudited Condensed Consolidated Financial Statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162018 (the “2016“2018 10-K”). All figures in the following discussion are presented on a consolidated basis. All dollar amounts and percentages presented herein have been rounded to approximate values.


Forward-Looking Statements


This report may contain “forward-looking statements,” as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not based on historical fact and involve assessments of certain risks, developments, and uncertainties in our business looking to the future. Such forward-looking statements can be identified by the use of terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “intend,” “continue,” or “believe,” or the negatives or other variations of these terms or comparable terminology. Forward-looking statements may include projections, forecasts, or estimates of future performance and developments. These forward-looking statements are based upon assumptions and assessments that we believe to be reasonable as of the date of this report. Whether those assumptions and assessments will be realized will be determined by future factors, developments, and events, which are difficult to predict and may be beyond our control. Actual results, factors, developments, and events may differ materially from those we assumed and assessed. Risks, uncertainties, contingencies, and developments, including those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and those identified in “Risk Factors” in the 20162018 10-K, could cause our future operating results to differ materially from those set forth in any forward-looking statement. There can be no assurance that any such forward-looking statement, projection, forecast or estimate contained can be realized or that actual returns, results, or business prospects will not differ materially from those set forth in any forward-looking statement. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments.

Recent Developments

Prior to October 2016, ATRM’s sole business was the manufacturing, selling and distributing modular housing units for residential and commercial use. On October 4, 2016, we completed the EBGL Acquisition, adding Glenbrook and EdgeBuilder to our operations. Currently, through


Overview
Through our wholly-owned subsidiaries, KBS, Glenbrook, EdgeBuilder, and EdgeBuilder,LSVM, we manufacture modular buildings for commercial and residential applications in production facilities located in South Paris and Waterford, Maine, operate a retail lumber yard located in Oakdale, Minnesota, and manufacture structural wall panels, permanent wood foundation systems and other engineered wood products for use in construction of commercialresidential and residentialcommercial buildings in a production facility located in Prescott, Wisconsin.

Wisconsin and provide investment advisory services to pooled investment vehicles, as well as other specialty investment vehicles. Our common stock, par value $0.001 per share, trades on the OTC Pink marketplace of the OTC Markets Group, Inc. under the symbol “ATRM.”






Recent Developments

LSV Co-Invest I and LSVM Waivers

On July 17, 2019, ATRM entered into two waivers with LSV Co-Invest I and one waiver with LSVM, pursuant to which the parties thereto agreed (i) that the closing of the Merger would not constitute an event of default under the terms of two promissory notes issued by ATRM to LSV Co-Invest I on January 12, 2018 and June 30, 2017, EBGL1, 2018 for the principal amounts of$0.5 million and $0.9 million, respectively, or under the terms of a promissory note issued by ATRM to LSVM on December 17, 2018 for the principal amount of $0.3 million, (ii) that neither LSV Co-Invest I nor LSVM would be entitled to accelerate any payment under such notes as a result of the closing of the Merger and (iii) upon the closing of the Merger, ATRM would be permitted to amend its governing documents in accordance with the terms of the Merger Agreement.    

Agreement and Plan of Merger
On July 3, 2019, the Company entered into the Premier LoanMerger Agreement with PremierDigirad, and Merger Sub, providing EBGLfor the merger of Merger Sub with and into the Company, with the Company surviving the Merger as a working capital linewholly owned subsidiary of creditDigirad.  The Merger Agreement was approved unanimously by the Board of upDirectors of the Company (the "Board"), following recommendation by a special committee of independent and disinterested directors.

At the effective time of the Merger, each share of Company common stock issued and outstanding immediately prior to the effective time (other than Excluded Shares) will be canceled and converted automatically into the right to receive 0.03 shares of Series A Preferred Stock.

Consummation of the Merger is subject to various closing conditions, including (i) approval by the Company’s shareholders, (ii)  the absence of any order, injunction, statute, rule, regulation or decree prohibiting, precluding, restraining, enjoining or making illegal the consummation of the Merger, (iii) the accuracy of the representations and warranties of each party (including there not having occurred a material adverse effect), (iv) performance, in all material respects, of all obligations and compliance with, in all material respects, agreements and covenants to be performed or complied with by each party, (v) declaration of effectiveness of the Registration Statement on Form S-4 filed by Digirad, (vi) the completion of a $3.0 million. million private placement of Series A Preferred Stock by the Digirad and (vii) the execution of an agreement by and between the Digirad and Jeffrey Eberwein, the Chairman of the Company’s Board, pursuant to which Digirad shall have the right to require Mr. Eberwein to acquire 100,000 shares of Series A Preferred Stock at a price of $10 per share for aggregate proceeds of $1.0 million at any time, in Digirad’s discretion, during the 12 calendar months following the effective time of the Merger.  If the Merger is not consummated by November 30, 2019, either party has the right to terminate the Merger Agreement, subject to certain conditions.

The Premier LoanCompany makes various representations, warranties and covenants in the Merger Agreement, replacedincluding covenants regarding: (i) the EBGL Loanconduct of the business of the Company prior to the consummation of the Merger, (ii) the calling and holding of a meeting of the Company’s shareholders to seek approval and (iii) the use of reasonable efforts to cause the Merger to be consummated.

Under the Merger Agreement, the Company is subject to a “no-shop” restriction on its ability to solicit offers or proposals relating to an alternative acquisition proposal or to provide information to or engage in discussions or negotiations with Gerber Finance,third parties regarding an alternative acquisition proposal. Until adoption of the Merger Agreement by the Company’s shareholders, the Company may only furnish information to, and engage in discussions and negotiations with, third parties making unsolicited acquisition proposals that the Board determines are reasonably likely to lead to a superior proposal and to terminate the Merger Agreement to accept a superior proposal.  The Merger Agreement provides Digirad certain rights to negotiate adjustments to the terms and conditions of the Merger Agreement upon a superior proposal.  The “no-shop” provision also includes a “fiduciary-out,” which was terminated onpermits the same date.

On June 30, 2017,Board to change its recommendation that shareholders vote in favor of the Merger if the Board concludes that a change is advisable to comply with its fiduciary duties under applicable law.  The Merger Agreement also provides Digirad with certain rights to negotiate adjustments to the terms and conditions of the Merger Agreement in order to avoid such change in Board recommendation.


The Merger Agreement allows the Company and EdgeBuilder Wall Panels, Inc.Digirad to terminate the Merger Agreement under certain circumstances.  Digirad may terminate if: (i) the Board changes its recommendation to shareholders to vote in favor of the transaction in accordance with the Merger Agreement, (ii) the Company breaches the Merger Agreement, or (iii) if the Company enters into an acquisition agreement with a third party following the receipt of a superior proposal. The Company may terminate if it enters into an acquisition agreement with a third party following the receipt of a superior proposal or if Digirad breaches the Merger Agreement.  Upon


termination of the Merger Agreement under specified circumstances (including upon acceptance of a superior proposal or a change in recommendation under the “fiduciary out”), the Company must pay Digirad a termination fee of $0.7 million and Glenbrook Lumber & Supply, Inc. (collectivelyreimburse Digirad for documented out-of-pocket expenses up to $0.2 million.

In addition, on May 15, 2019, Digirad and ATRM entered into an Agreement which provides that, in the “EBGL Sellers”) amendedevent the EBGL Asset Purchase Agreement, replacing EBGL’s obligationsMerger does not close on or prior to payDecember 31, 2019, ATRM will reimburse Digirad of certain deferred paymentsconsulting and related fees paid by Digirad on behalf of ATRM. We anticipate the Merger to close in the third quarter of 2019; however, there can be no assurance regarding timing of completion of regulatory approvals, which could delay timing of the closing and the Merger would remain subject to the EBGL Sellers ($0.75 million)satisfaction of customary closing conditions including the passing vote of the Company's shareholders.

The representations, warranties and covenants of the contingent earn-out payment ($1.0 million)Company contained in the Merger Agreement (i) have been made only for purposes of the Merger Agreement; (ii) have been qualified by (a) matters specifically disclosed in any reports filed by the Company with set monthly payments totaling $1.8 million, payablethe Securities and Exchange Commission (the “SEC”) and (b) confidential disclosures made to Digirad and Merger Sub in connection with an initial $200,000 paymentthe Merger Agreement; (iii) are subject to materiality qualifications contained in the Merger Agreement that may differ from what may be viewed as “material” by investors; (iv) are made only as of the date of the Merger Agreement and as of the date the Merger closes, or such other date as is specified in the Merger Agreement; and (v) have been included in the Merger Agreement for the purpose of allocating risk between the contracting parties rather than establishing matters as facts. Accordingly, the Merger Agreement is included with this filing to provide investors with information regarding the terms of the Merger Agreement, and not to provide investors with any other factual information regarding the Company or its business. Investors should not rely on the representations, warranties or about July 3, 2017,covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company or any of its affiliates. Moreover, information concerning the subject matter of the representations and 16 monthly installments beginningwarranties may change after the date of the Merger Agreement, which subsequent information may or may not be reflected fully or at all in the Company’s public disclosures. The Merger Agreement should not be read alone, but must be read in conjunction with the other information regarding the Company that is or will be contained in, or incorporated by reference into, the annual, quarterly and current reports, proxy statements and other documents that the Company files or has filed with the SEC.

As of August 1, 2017,14, 2019, Jeffrey E. Eberwein, the Chairman of the Company’s Board, owns approximately 17.4% of the outstanding common stock of ATRM. Mr. Eberwein also is the Chairman of the Board of Digirad and ending on November 1, 2018.

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On September 29, 2017, we completedbeneficially owns 88,166 shares of Digirad's common stock, or approximately 4.3% of the Exchange, issuing toshares outstanding. Mr. Eberwein is also the Chief Executive Officer of Lone Star Value Management, LLC ("LSVM"), which is the investment manager of LSVI and LSV Co-Invest I, a totaland LSVI owns 222,577 shares of 132,548the Company’s Series B Stock and another 374,562 shares of Series B Stock in exchange forare owned directly by LSV Co-Invest I. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the return and cancellation of allbeneficial owner of the Notes heldsecurities owned by LSVI and LSV Co-Invest I. The Notes had an aggregateMr. Eberwein disclaims beneficial ownership of $13.3 million unpaid principal and accrued and unpaid interest outstanding at the time of their cancellation. The material terms of the Series B Stock, are described inexcept to the Company’s Current Report on Form 8-K filed with the SEC on October 4, 2017.

On January 12, 2018, the Company issued toextent of his pecuniary interest therein. LSV Co-Invest I analso holds unsecured promissory notenotes of the Company in the principal amount of $0.5totaling $1.4 million, in exchange for the same amount in cash (the “LSV Co-Invest I Note”). The LSV Co-Invest I Note was issued pursuant to a securities purchase agreement by and between the Company and LSV Co-Invest I dated as of the same date. The LSV Co-Invest I Note bears interest at 10.0% per annum, with interest payable semiannually; provided, however, LSV Co-Invest I may elect to receive any interest as PIK Interest at an annual rate of 12.0%, so long as any such interest payment is made either (x) entirely in PIK Interest or (y) 50% cash and 50% PIK Interest. Any unpaid principal and interest under the LSV Co-Invest I NoteNotes Payable, and LSVM holds an unsecured note with a principal amount totaling $0.3 million proceeds of which are to be paid to Mr. Eberwein based upon conditions set forth in the LSVM purchase agreement, the LSVM Note. In addition, LSVI has pledged up to $3.0 million plus additional fees as collateral for a current debt of ATRM.

Digirad Joint Venture and Services Agreement

On December 14, 2018, the Company entered into a Joint Venture Agreement with Digirad (the "Joint Venture Agreement"), forming Star Procurement, LLC ("Star Procurement"), with each of ATRM and Digirad holding a 50% interest. The purpose of the joint venture is duefor Star Procurement to purchase from third parties and sell building materials and related goods to KBS Builders, Inc., the Company's wholly owned subsidiary. Star Procurement entered into a Services Agreement (the "Services Agreement") on January 12, 2020.2, 2019 with KBS in connection with the joint venture. Digirad's initial capital contribution to the joint venture was $1.0 million. ATRM did not make an initial capital contribution.
Voting and Support Agreement

On July 3, 2019, in connection with the Merger Agreement, Digirad entered into a voting and support agreement (the “Voting Agreement”) with all of the holders of the Company’s preferred stock and approximately 17.4% of the Company’s common stock. The Company may prepay the LSV Co-Invest I Note at any time after a specified amount of advance notice to LSV Co-Invest I (subject to certain restrictionshas been advised that under the Company’s existing loan agreements).terms of the Voting Agreement, each of the referenced shareholders agreed, among other things, to vote, and irrevocably appointed Digirad as its proxy to vote, all of their shares in favor of the approval of the Merger and adoption of the Merger Agreement.  The LSV Co-Invest I Note provides for customary eventsVoting Agreement terminates on the earlier of default,(a) the occurrenceeffective date of anythe Merger and (b) the termination of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable.

Merger Agreement.






Results of Operations


Net Loss.Sales. Net losssales were approximately $6.9 million for the three months ended March 31, 2017, wasJune 30, 2019 compared with approximately $0.9 million as compared to net loss of approximately $1.7$11.3 million for the same period in 2016. This improvement in operating results from the prior year2018. The decrease was primarily due to the acquisition of EBGL’s operations completeda decrease in October 2016,KBS’s net sales, which added an overall gross margin of $0.4 million, and an improvement in overall gross margins at KBS due to operational improvements as discussed below.

Net Sales. Net sales were approximately $9.4$2.9 million for the three months ended March 31, 2017,June 30, 2019 as compared with approximately $5.1to $4.9 million for the same period in 2016; an increase of approximately $4.3 million. The addition of the2018, a decrease in EBGL operations,net sales which were acquired in October 2016, added approximately $3.8 million in net sales for the three months ended March 31, 2017. The remaining increase of $0.5 million is related to the growth of net sales for KBS. KBS’s net revenues for the three months ended March 31, 2017 were approximately $5.6 million as compared to approximately $5.1$4.0 million for the three months ended March 31, 2016. KBS’s growthJune 30, 2019 compared to $5.5 million for the comparable period in 2018 and a decrease in LSVM net sales, which were approximately $49.7 thousand for the three months ended June 30, 2019 as compared to $0.9 million for the same period in 2018. The decrease in KBS net sales was driven primarily due to a decrease in commercial developer sales as the Company adjusts to the strategic shift away from large commercial projects with significant site work to focus on its core competency of manufacturing modular buildings for residential customers, as disclosed in Note 2 to the condensed consolidated financial statements. The decrease in EGBL sales was primarily due to timing.

Net sales were approximately $14.3 million for the six months ended June 30, 2019 compared with approximately $19.1 million for the same period in 2018. The decrease was primarily due to a decrease in KBS’s net sales, which were approximately $5.3 million for the six months ended June 30, 2019 as compared to $9.8 million for the same period in 2018 and a decrease in LSVM net sales which were approximately $83.7 thousand for the six months ended June 30, 2019 as compared to $0.9 million for the same period in 2018. These decreases were partially offset by an increase in EBGL net sales which were approximately $8.9 million for the salesix months ended June 30, 2019 compared to $8.4 million for the comparable period in 2018. The decrease in KBS net sales was primarily due to a decrease in commercial developer sales as the Company adjusts to the strategic shift away from large commercial projects with significant site work to focus on its core competency of single-family homes, which increased frommanufacturing modular buildings for residential customers, as disclosed in Note 2 to the condensed consolidated financial statements.
Cost of Sales. Cost of sales amounted to approximately $3.5$5.8 million for the three months ended March 31, 2016June 30, 2019, compared to approximately $4.6 million for the three months ended March 31, 2017. This $1.1 million increase in the sale of single-family homes was partially offset by a decrease in revenue related to commercial projects of approximately $0.6 million from approximately $1.6 million for the three months ended March 31, 2016 to approximately $1.0 million for the three months ended March 31, 2017. The decrease in commercial project revenue reflects KBS’s previously announced strategic plan to focus on its residential home business, while continuing to be selective in the major commercial projects it selects. Net revenue from the sales of single-family homes represented 82% and 69% of total KBS net revenue for the three-month periods ended March 31, 2017 and 2016, respectively. Conversely, net revenue from commercial projects represented 18% and 31% of total KBS net revenue for the three-month periods ended March 31, 2017 and 2016, respectively. Additionally, the increase in sales of single-family homes at KBS for the three-month period ended March 31, 2017, as compared to the three-month period ended March 31, 2016, included an improved sales mix of its residential single-family homes, which contributed to the increase in overall gross margins.

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Cost of Sales. Cost of sales amounted to approximately $8.2 million for the three months ended March 31, 2017, compared with approximately $5.4$9.0 million for the same period in 2016.2018. This increase of approximately $2.8 milliondecrease was due to the addition the addition of the EBGL operations, which were acquired in October 2016, which added approximately $3.4 million in cost of sales for the three months ended March 31, 2017. This increase due to the EBGL Acquisition was partially offset by the decrease of approximately $0.6 million in the cost of sales for KBS. Despite the growth in KBS’s net revenues over the prior first quarter, KBS’s costs of sales decreased. This decrease in cost ofnet sales forat KBS as compared to the prior yearand EBGL and also reflects the results of KBS’sthe Company's strategic initiatives at KBS including more selectivity in the commercial projects the companyCompany undertakes, improved project pricing (including implementing(implementing regular price increases to its customers) and ongoing cost control and efficiency measures, as disclosed in Note 2 to the Condensed Consolidated Financial Statements,condensed consolidated financial statements, resulting in lower direct and overhead costs. Additionally,

Cost of sales amounted to approximately $12.2 million for the six months ended June 30, 2019, compared to approximately $16.0 million for the same period in 2018. This decrease was due to the strong backlog asdecrease in net sales at KBS and also reflects the results of December 31, 2016, going into the first quarter, KBS was able to operate its South Paris factory at or near full capacity through the entire first quarter of 2017 as compared to the first quarter of 2016 where the factory operated at only approximately half capacity throughout the quarter due to a seasonal weakness in sales and limited backlog. TheCompany's strategic initiatives at KBS coupled with anincluding more selectivity in the commercial projects the Company undertakes, improved sales mixproject pricing (implementing regular price increases to its customers) and high capacity utilization rates, have resultedongoing cost control and efficiency measures, as disclosed in higher gross margins for the first three months of 2017 as comparedNote 2 to the same periodcondensed consolidated financial statements, resulting in 2016.

lower direct and overhead costs.

Selling, General and Administrative.Administrative. Selling, general and administrative (“SG&A”) expense remained primarily the same year over year and was approximately $1.7 million and $1.0$2.0 million for the three months ended March 31, 2017,June 30, 2019 and 2016,2018, respectively. The increase in SG&A expense of $0.7 million is primarily attributable to the addition of the EBGL operations, which were acquired in October 2016, which added approximately $0.5 million of selling,
Selling, general and administrative expenses (including(“SG&A”) expense remained primarily the same year over year and was approximately $3.6 million for the six months ended June 30, 2019 and 2018, respectively.
Gain on Sale of Assets. Gain on sale of assets was approximately $0.5 million in the three and six months ended June 30, 2019, respectively. The gain was generated by the sale of the Maine Facilities in the second quarter of 2019 (see Note 13 to the condensed consolidated financial statements).
Gain on Settlement of Liabilities. The gain on settlement of liabilities was approximately $0.1 million in the three and six months ended June 30, 2019, respectively. The gain was generated by the settlement of amortization expense relatedliabilities with vendors in the second quarter of 2019 (see Note 13 to the acquired intangible assets) to the Company’s operating results. In addition, SG&A increased due to higher legal fees incurred related to post-acquisition related matters with respect to the EBGL Acquisition, as well as higher costs for KBS related to commissions and bank services charges incurred in 2017 not incurred in the same period in 2016. Commissions at KBS relate to the addition of outside sales representatives in 2016 and bank service charges related to the KBS line of credit with Gerber Finance added in February 2016.condensed consolidated financial statements).

Interest Expense. Interest expense increased bywas approximately $0.3$0.2 million fromfor the three months ended June 30, 2018 and approximately $0.3 million for the three months ended March 31, 2016June 30, 2019. See Notes 15 and 16 to the condensed consolidated financial statements for further details of the Company’s outstanding debt.
Interest expense was approximately $0.6$0.5 million for the threesix months ended March 31, 2017. This increase is attributableJune 30, 2019 and 2018, respectively. See Notes 15 and 16 to the increase in overall debt for the Company from approximately $12.8 million at March 31, 2016, to approximately $20.5 million at March 31, 2017. See Notes 13 and 14 to the Condensed Consolidated Financial Statements for the period ended March 31, 2017,condensed consolidated financial statements for further details onof the Company’s outstanding debt. In addition to


Change in Fair Value of Contingent Earn-outs, net. We assess the overall increasefair value of our contingent earn-outs at the end of each quarter. The contingent earn-out receivable included in outstanding debt, the increase in interest expenseour balance sheets at June 30, 2018 is also attributable to the higher interest rate related to the Notes held by LSVI and LSV Co-Invest I, which were accrued at the PIK Interest ratetransfer of 12%our test handler product line to Boston Semi Automation LLC ("BSA") in April 2014. Change in fair value of contingent earn-out receivable during the three and six months ended MarchJune 30, 2018 represented a net decrease of approximately $0.2 million and $0.4 million, respectively, in the fair value of this earn-out as a result of timing and payments. As of December 31, 2017, versus the cash interest rate of 10% for the same period in 2016. The Company elected the PIK Interest option for the three-month period ended March 31, 2017.2018 all payments by BSA had been made.

Income Taxes.Taxes. Since 2009, we have maintained a valuation allowance to fully reserve our deferred tax assets. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, a decrease in shareholders’ deficit. We recorded income tax expense of $4,000$11.0 thousand for the three months ended March 31, 2017June 30, 2019 and 2016,2018, respectively, and $14.0 thousand and $15.0 thousand for the six months ended June 30, 2019 and 2018, respectively, which included deferred income tax expense associated with taxable differences related to our indefinite-lived intangible assets, which are omitted from the calculation of our valuation allowance due to the unpredictability of the reversal of these differences.

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Net (Loss) Gain. Net loss for the three months ended June 30, 2019 was approximately $0.5 million as compared to net gain of approximately $0.1 million for the same period in 2018. Net loss for the six months ended June 30, 2019 was approximately $1.4 million as compared to net loss of approximately $1.1 million for the same period in 2018. The changes in net (loss) gain were primarily due to the factors described above.


Financial Condition, Liquidity and Capital Resources


Cash, and cash equivalents includingand restricted cash decreased by approximately $0.6 million in the threesix months ended March 31, 2017.

June 30, 2019.


Cash flowsNet cash used in operating activities. In the threesix months ended March 31, 2017,June 30, 2019, cash flows used in operating activities were approximately $1.2$2.5 million, consisting primarily of changes in working capital of approximately $1.1 million and our net loss $1.4 million, our $0.5 million gain on sale of approximately $0.9 million and the non-cash net changes in the fair value of our contingent earnouts of approximately $0.2 million, partially offset by the non-cash PIK Interest of approximately $0.6 million, approximately $0.4 million of non-cash depreciation amortization and share-based compensation expense. Working capital changes for the three-month period ended March 31, 2017, netted to approximately $1.1 million including an increase of approximately $1.8 million in accounts receivable resulting from the increased sales activity and the timing differences in billings to customers and payments received from customers,equipment, and a net decrease in operating assets and liabilities of approximately $0.5$0.3 million in other accrued liabilities,which primarily accrued interest. These were partially offset by increases of approximately $0.9 millionincluded a decrease in trade accounts payable of $1.3 million, offset by a decrease in accounts receivable of $0.6 million, and $0.2 millionan decrease in billings in excessinventories of costs and estimated profit.$0.4 million.


In the threesix months ended March 31, 2016,June 30, 2018, cash flows used in operating activities waswere approximately $1.9$1.7 million, consisting primarily of our net loss of approximately $1.7$1.1 million and approximately $0.4a net decrease in operating assets and liabilities of $1.2 million which primarily included an increase in working capital changes,accounts receivable of $2.1 million and an increase in inventories of $0.8 million, partially offset by an increase in trade accounts payable of $1.9 million.

Net cash provided by investing activities. Net cash flows provided by investing activities were approximately $3.9 million for the six-month period ended June 30, 2019 which included $3.9 million from the sale of equipment and $63.0 thousand proceeds from earn-out consideration.

Net cash flows provided by investing activities were approximately $0.2 million of non-cash depreciation, amortization and share-based compensation expense. Working capital changes using cashfor the six-month period ended June 30, 2018 which included a $0.3 million increase in costs and estimated profit in excess of billings and decreases of approximately $1.1 million, $0.2 million and $0.7 million in accounts payable, billings in excess of costs and estimated profit, and other accrued liabilities, respectively, partially offset by decreases of approximately $1.5 million and $0.3 million in accounts receivable and inventories, respectively, and a $0.2 million increase in accrued compensation. The decreases in accounts receivable, inventories and accounts payable were primarily attributable to the lower sales and production activity in the first quarter of fiscal year 2016 compared to the fourth quarter of fiscal year 2015. The increase in costs and estimated profit in excess of billings resulted primarilyproceeds from an increase in work in process related to projects scheduled for delivery in the second quarter of fiscal year 2016. The decrease in billings in excess of costs and estimated profit reflected primarily the delivery of modules for two multi-tenant buildings in the first quarter of fiscal year 2016. The decrease in other accrued liabilities included the settlement of approximately $0.3 million in accrued sales rebates and decreases of approximately $0.3 million and $0.1 million in accrued interest expense and accrued severance costs, respectively.

earn-out consideration.


Cash flows generated by investing activities. Cash flows from investing activities were insignificant for the three-month periods ending March 31, 2017 and 2016, amounting to less than $0.1 million.

Cash flows generatedNet cash (used in) provided by financing activities. In the threesix months ended March 31, 2017,June 30, 2019, cash flows generatedused in financing activities were approximately $1.9 million, which included $3.0 million of net payments on the KBS Loan Agreement and the EBGL Loan Agreement and $1.0 million of cash provided by joint venture partner, Digirad.


In the six months ended June 30, 2018, cash flows provided by financing activities waswere approximately $0.6$2.2 million, which included $0.5$1.4 million of proceeds from the issuance of the promissory note to LSV Co-Invest I on March 31, 2017long-term debt and approximately $0.7 million of net advances under the revolving lines of credit for KBS and EBGL, offset by approximately $0.5 million in payments on our long-term debt including a scheduled payment of $0.25 million to the EBGL Sellers and three scheduled payments totaling $0.3 million to the primary seller of KBS.

In the three months ended March 31, 2016, cash flows generated by financing activities was approximately $1.5 million, which included approximately $2.9$1.1 million of net advances under the KBS Loan Agreement and the EBGL Loan Agreement, partially offset by payments of approximately $0.2 million for financing costs under this line of credit, and approximately $1.3$0.6 million to reduce principal balances of our long-term debt.

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We acknowledge that the Company continues to face a challenging operating environment, and while we continue to focus on improving our overall profitability, we reported an operating loss for the quarter ended March 31, 2017.June 30, 2019. We have incurred significant operating losses in recent years and, as of March 31, 2017,June 30, 2019, we had an accumulated deficit of approximately $81$93.6 million.  Working capital has remained negative over the past several years. Cash used in operating activities, while improved as compared to the quarter ended March 31, 2016, remains negative for the quarter ended March 31, 2017. This has required us to generate funds from investing and financing activities. At March 31, 2017,June 30, 2019, we had outstanding debt of approximately $20.5 million.

$8.8 million of which $6.6 million is currently payable. These factors raise substantial doubt about the Company's ability to continue as a going concern.



We have issued various promissory notes to finance our acquisitions of KBS and EBGL and to provide for our general working capital needs. As of March 31, 2017,June 30, 2019, we had outstanding debt totaling approximately $20.5$8.8 million. Our debt primarily included (i) $2.3$0.9 million principal outstanding on KBS’s $4.0 million revolving credit facility under a loan and security agreement (as amended, the KBS"KBS Loan Agreement, $1.8Agreement") with Gerber Finance Inc. ("Gerber Finance"), and $3.0 million principal outstanding under a loan and security agreement with Gerber Finance used to finance the acquisition of EBGL (as amended, the “Acquisition Loan Agreement”), and (ii) $2.6 million principal outstanding on EBGL’s $3.0 million revolving credit facility under the EBGLa revolving credit loan agreement with Premier Bank (the "Premier Loan Agreement and $3.0Agreement"). We also have debt with related parties which includes (i) $1.5 million principal outstanding under the Acquisition Loan Agreement, (ii) $4.5 million principal amount of Notes issued to LSVI and $7.6 million principal amount of Notes issued to unsecured promissory notes with Lone Star Value Co-Invest I, LP ("LSV Co-Invest I,I"), with interest payable semiannually andsemi-annually at a rate of 10.0% per annum (LSV Co-Invest I may elect to receive interest in-kind at a rate of 12.0% per annum), with any unpaid principal and interest is due on April 1, 2019,January 12, 2020 ("LSVI Co-Invest I Notes Payable", otherwise referred to herein and defined below as the LSV Co-Invest I January Note and LSV Co-Invest I June Note) (ii) $0.3 million of unsecured promissory notes with to LSVM, with interest payable annually at a rate of 10.0% per annum (LSVM may elect to receive any interest payment entirely in-kind at a rate of 12.0% per annum), with any unpaid principal and interest due on November 30, 2020 ("LSVM Note"), and (iii) $0.4a $0.3 million principal amount outstanding under an unsecured promissory note issuedwith Digirad Corporation ("Digirad") (NASDAQ: DRAD), a related party, with interest payable at 10.0%per annum for the first 12 months of its term, and at 12.0% per annum for the remaining 12 months, with any unpaid principal and interest due on December 14, 2020.
As of December 31, 2018, KBS was not in compliance with the financial covenants under the KBS Loan Agreement requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of these test dates. Additionally, KBS was not in compliance with the requirement to deliver the primary sellersCompany's fiscal year-end financial statements reviewed by an independent certified accounting firm acceptable to Gerber Finance within 105 days from the fiscal year ended December 31, 2018. The occurrence of any event of default under the KBS payableLoan Agreement may result in monthly installmentsKBS’s obligations under the KBS Loan Agreement becoming immediately due and payable. In April 2019 and June 2019, we obtained a waiver from Gerber Finance for these events. In addition, the Company and Gerber Finance agreed to eliminate the minimum leverage ratio covenant for years after 2018.
As of $100,000, inclusiveDecember 31, 2018, EBGL was not in compliance with the following covenants under the Premier Loan Agreement: (i) requirement to maintain a Debt Service Coverage Ratio for the calendar year of at least 1.0; and (ii) a requirement to deliver the Company's fiscal year-end audited financial statements within 120 days of the end of each calendar year. The occurrence of any event of default under the Premier Loan Agreement may result in EBGL’s obligations under the Premier Loan Agreement becoming immediately due and payable. In July 2019, we obtained a waiver from Premier Bank for these events through October 1, 2019 (the current maturity date of the Premier Loan Agreement).

If the Company fails to comply with any financial covenants under our loan agreements with Gerber Finance or Premier Bank going forward, the applicable lender(s) may demand the repayment of the credit facilities amount outstanding and any unpaid interest thereon.

We have implemented several strategic initiatives, effected certain actions and continued to consider additional actions to improve the Company’s overall profitability and increase cash flows, including:
KBS’s efforts to improve operating efficiencies, including reconfiguring the South Paris factory to increase production, investments in automated equipment to reduce labor costs, implementing lean manufacturing techniques, and elimination of duplicate overhead costs through July 1, 2017. We also had obligationsthe shut-down of the Waterford factory;
Reduction in KBS workforce including manufacturing, sales, engineering and front-office staff;
KBS implemented a new dynamic pricing model for 2018, which was designed to make $0.75 million in deferred cash paymentsdetermine its bid price quoted to customers on the most current cost information to better ensure full recovery of its manufacturing costs and improve overall gross margins;
In November 2018, EBGL made the final payment due to the sellers of EBGL, payablefreeing up $0.1 million per month of cash flows to be used for operations;
As discussed in quarterly installmentsNote 16, in January 2018 and in June 2018, the Company issued unsecured promissory notes in the principal amounts of $250,000, inclusive$0.5 million and $0.9 million, respectively, to LSV Co-Invest I to provide additional working capital for the Company;
In April 2019, KBS and EBGL executed sale leasebacks of interest, through October 1, 2017.several of their real estate properties (see further discussion in Note 13); and Since March


We continue to look for opportunities to refinance our remaining debt on more favorable terms.
On July 3, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Digirad, and Digirad Acquisition Corporation, a Minnesota corporation and newly-formed subsidiary of Digirad (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Digirad.  The Merger Agreement was approved unanimously by the Board, following recommendation by a special committee of independent and disinterested directors.
At the effective time of the Merger, each share of Company common stock issued and outstanding immediately prior to the effective time (other than shares (i) owned by the Company or any subsidiary, (ii) owned by Digirad or Merger Sub, or (iii) held by shareholders who have perfected and not withdrawn a demand for appraisal rights under Minnesota law (collectively (i), (ii) and (iii), “Excluded Shares”)) will be canceled and converted automatically into the right to receive 0.03 shares of a newly created Series A non-convertible perpetual preferred stock, par value $0.0001 per share, of Digirad (“Series A Preferred Stock”).  Each share of the Company’s Series B Stock issued and outstanding immediately prior to the effective time (other than Excluded Shares) will be canceled and converted automatically into the right to receive 2.5 shares of Series A Preferred Stock.
In addition, on May 15, 2019, Digirad and ATRM entered into an Agreement which provides that, in the event the Merger does not close on or prior to December 31, 2017, we have made2019, ATRM will reimburse Digirad of certain consulting and related fees paid by Digirad on behalf of ATRM. We anticipate the following changesMerger to close in the third quarter of 2019; however, there can be no assurance regarding timing of completion of regulatory approvals, which could delay timing of the closing, and the Merger would remain subject to the satisfaction of customary closing conditions including the passing vote of the Company's shareholders.

Our historical operating results indicate substantial doubt exists related to the Company’s outstanding debt:

●On June 30, 2017, the EBGL Loan Agreement was repaid in full in conjunction with EBGL entering into a new revolving credit agreement with Premier Bank, which refinanced the amounts outstanding at that time under the EBGL Loan Agreement;
●

On September 29, 2017, the promissory notes issued to LSVI and LSV Co-Invest I which were outstandingability to continue as a going concern. We cannot predict with certainty the outcome of March 31, 2017, along with accrued interest through September 29, 2017, were exchanged for shares of the Company’s Series B Cumulative Preferred Stock;

●The remaining $0.4 million principal amount outstanding on the unsecured promissory note issued to the primary sellers of KBS was paid in full, as scheduled, with the final payment made in July 2017;
●In June 2017, the $0.75 million deferred cash payments due to the sellers of EBGL, along with the $1.0 million contingent earnout payable, were replaced with set monthly payments totaling $1.8 million payable with an initial $0.2 million payment on or about July 3, 2017, and 16 monthly installments of $0.1 million beginning August 1, 2017, and ending on November 1, 2018; and
●In January 2018, the Company issued a new, unsecured promissory note in the principal amount of $0.5 million to LSV Co-Invest I to provide for additional working capital for the Company.

Jeffrey E. Eberwein, our Chairmanactions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the Board, isexpected liquidity as currently planned.

If we continue to experience operating losses, and we are not able to generate additional liquidity through the managermechanisms described above or through some combination of LSVGP,other actions, we may not be able to continue operations. Additionally, a failure to generate additional liquidity could negatively impact our access to materials or services that are important to the general partneroperation of LSVI and LSV Co-Invest I, and the sole memberour business. In addition, these losses could further trigger violations of LSVM, the investment managercovenants under our debt agreements, resulting in accelerated payment of LSVI.

these loans.

There can be no assurance that our existing cash reserves, together with funds generated by our operations and any future financings, will be sufficient to satisfy our debt payment obligations, to avoid liquidity issues and/or fund operations beyond this fiscal year. Our inability to generate funds from our operations and/or obtain financing sufficient to satisfy our payment obligations may result in our obligations being accelerated by our lenders, which would likely have a material adverse effect on our business, financial condition and results of operations. In addition, continued operating losses could further trigger violations of covenants under our debt agreements, resulting in accelerated payment of these loans. Given these uncertainties, there can be no assurance that our existing cash reserves will be sufficient to avoid liquidity issues and/or fund operations beyond this fiscal year.

During 2015, 2016, and into 2017, we implemented several strategic initiatives, effected certain actions and continued to consider additional actions to improve the Company’s overall profitability and increase cash flows, including:

●KBS’s strategic shift away from large commercial projects with significant site work to focus on its core competency of manufacturing modular buildings;
●KBS’s efforts to improve operating efficiencies, including reconfiguring the South Paris factory to increase production, investments in automated equipment to reduce labor costs, implementing lean manufacturing techniques, and elimination of duplicate overhead costs through the shut-down of the Waterford factory;
●Reduction in KBS workforce including manufacturing, sales, engineering and front-office staff;
●KBS increased pricing on its base ranch model in 2017, and in November 2017, instituted a 6% lumber surcharge on all new orders to help offset the significant rise in lumber and other raw materials costs;
●KBS has implemented a new dynamic pricing model for 2018, which is designed to determine its bid price quoted to customers using the most current cost information;
●KBS is exploring opportunities to monetize the Waterford facility, including a potential sale or lease to a third party;
●In July 2017, KBS made the final payment due to the primary seller of KBS, freeing up $100,000 per month of cash flows to be used for operations;
●

In October 2016, the Company acquired the EBGL businesses, which we believe that, after a transitional period, will generate net income and positive cash flows for the Company;

●In 2017, we instituted a lumber hedging program for EBGL to assist in preserving existing margins against the potential large fluctuations in lumber raw material prices;

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●In August 2016, we amended certain of our debt agreements to allow the Company to pay PIK Interest on approximately $11 million of our debt, reducing strain on current cash flows;
●In June 2017, we refinanced EBGL’s revolving credit facility and amended the terms of our agreement with the EBGL Sellers providing for deferred payments to obtain more favorable lending and payment terms and reduce total fees paid under these agreements;
●In September 2017, we converted $13.3 million of the Company’s outstanding debt, including accrued interest, to preferred stock;
●In January 2018, the Company issued an unsecured promissory note in the principal amount of $0.5 million to LSV Co-Invest I to provide additional working capital for the Company; and
●We continue to look for opportunities to refinance our remaining debt on more favorable terms.

Although we cannot predict, with certainty, the outcome of any individual action to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned, we believe that through these actions taken as a whole, and management’s continued efforts to improve operating results and find additional liquidity resources, we can satisfy our estimated liquidity needs for the next twelve months.

In addition to the above actions, although not a binding commitment, LSVM has advised us of its present intention to continue to financially support the Company in the event that additional financing is required. From 2014 through 2017, and again in 2018, LSVM has provided financial support in the form of financing through various debt agreements. Based on LSVM’s historical support of the Company, management believes that additional financing may be provided by LSVM or its affiliates, if necessary, in the future.

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We believe that the actions discussed above have either already occurred or are probable of occurring, and mitigate the substantial doubt raised by our historical operating results, as well as satisfy our estimated liquidity needs for the twelve months from the issuance of the consolidated financial statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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None.
Item 4.Controls and Procedures


Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our chief executive officer and our chief financial officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”"Exchange Act")). Based on their evaluation of our disclosure controls and procedures and due to the material weaknesses described below, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2017,June 30, 2019, to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and


communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting
Our management, with oversight by the Board, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2019, based on the criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation and due to the material weaknesses described below, our management, including our chief executive officer and chief financial officer, concluded that our internal control over financial reporting was not effective as of June 30, 2019.
Description of Material Weaknesses

In April 2014, we acquired the assets

Our internal control over financial reporting is supported by written policies and assumed certain liabilities relatedprocedures that (1) pertain to the operationsmaintenance of KBSrecords that, in reasonable detail, accurately and subsequently,fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in October 2016, we acquiredaccordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We have identified certain assets relateddeficiencies in the principles associated with each component of the COSO framework, as described below, which our management concluded constitute material weaknesses, either individually or in the aggregate.
Control Environment
We did not maintain an effective control environment based on the criteria established in the COSO framework to enable the operationsidentification and mitigation of EBGL. Priorrisks of material accounting errors based on:
An insufficient number of personnel with an appropriate level of GAAP knowledge and experience to create the acquisitions,proper environment for effective internal control over financial reporting and to ensure that (i) there were adequate processes for oversight, (ii) there was accountability for the KBSperformance of internal control over financial reporting responsibilities, and EBGL operations(iii) corrective activities were privately-owned businesses with very limited administrativeappropriately applied, prioritized, and accounting resources, outdated accounting software and generally weak accountingimplemented in a timely manner.
Our oversight processes and procedures that guide individuals in applying internal control procedures.over financial reporting were not adequate in preventing or detecting material accounting errors.
The Company does not utilize a perpetual inventory system for tracking inventory at KBS. The Company’s processes and controls for tracking costs through the production processes and cost of sales was not considered effective.
Risk Assessment
We did not design and implement an effective risk assessment based on the criteria established in the COSO framework, specifically relating to: (i) identifying, assessing, and communicating appropriate objectives, (ii) identifying and analyzing risks to achieve these objectives, and (iii) identifying and assessing changes in the business that could impact our system of internal controls.
Control Activities
We did not design and implement effective control activities based on the criteria established in the COSO framework. Specifically, the control activities did not adequately (i) address relevant risks, (ii) provide evidence of performance, (iii) provide appropriate segregation of duties, or (iv) operate at a level of precision to identify all potentially material errors.



Information and Communication
We did not generate and provide quality information and communication based on the criteria established in the COSO framework, specifically relating to communicating accurate information internally and externally, including providing information pursuant to objectives, responsibilities, and functions of internal control.
Monitoring Activities
We did not design and implement effective monitoring activities based on the criteria established in the COSO framework. Specifically, we did not maintain effective monitoring controls to ascertain whether the components of internal control are present and functioning.
Remediation Plan and Status for Material Weaknesses in Internal Control over Financial Reporting
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, management concluded as of December 31, 2018 that several material weaknesses existed at that date. Management has been engaged in KBS’s and EBGL’s financial reporting processes with respectremediation efforts to (1)address the material weaknesses. We have made enhancements to our control over accounts payable cut-offs, (2) inventory accounting, (3) contract accounting and (4) inadequate segregation of duties in certain accounting processes,environment from various activities including the payroll, cash receiptsfollowing:
Engage external consultants to provide support related to more complex applications of GAAP and disbursements processesdocument and management of user access rights inassess our accounting system, partly as a result of our limited sizepolicies and accounting staff.

Remediation of Material Weaknesses

We are working to remediate these material weaknesses. Since the April 2014 acquisition of KBS, we have implemented organizational changes to strengthen the accountingprocedures for existing accounts and other administrative functions at KBS and improvements in processes, procedures and controls, including in the areas of payroll processing, contract accounting, proper transaction cutoffs, inventory controls, financial reporting and management oversight. In January 2016, we installed a new management information system at KBS that we believe, when fully implemented, will significantly improve our reporting and controls. processes.

At EBGL, we are in the process of implementing improvements in internal processes, procedures and controls and establishing regular reporting and routine management oversight. EBGL
The Company is in the process of upgradinganalyzing its financial management information system which is expectedlimitations and designing or implementing system upgrades to be fully operational by the end of 2017. The upgrade of the old system, which was over 20 years old, will significantly improve EBGL’s financial reporting capabilitiesable to properly track production costs.
We continue to redesign and provide enhanced controls.

Although significant progress has been made in improving the controls at KBS, additional time is requiredimplement internal control activities. We continue to fully develop adequate processes,establish policies and procedures and enhance corporate oversight over process-level controls and structures to determine whether such processesensure that there is appropriate assignment of authority, responsibility, and controls are effective. At EBGL, the improvements are at an early state, so we expect it will take significant additional timeaccountability to fully develop and implement an adequate system of internal controls. We will continue to work to improve such processes, procedures and controls, and will disclose in future periods the progressenable remediating our material weaknesses.

While we have made inand expect to make additional improvements to our effortsinternal controls, we may determine that additional steps beyond those described above may be necessary to remediate thesethe material weaknesses.

Changes in Internal Control Over Financial Reporting

As a result While we intend to resolve all of the material control deficiencies at KBS and EBGL discussed above, we determinedcannot provide any assurance that we have material weaknesses inthese remediation efforts will be successful, will be completed quickly, or that our internal control over financial reporting.reporting will be effective as a result of these efforts by any particular date. We are workinghave not yet quantified the cost to remediate these material weaknesses as discussed above.

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implement our planned remediation activities related to our existing or acquired businesses, which have not been fully assessed.






PART II. OTHER INFORMATION

Item 1.Legal Proceedings

The Company is and may become involved in various lawsuits as well as other certain legal proceedings that arise in the ordinary course of business. Information regarding certain material proceedings is provided below.

UTHE Technology Corporation v. Aetrium Incorporated

Since December 1993, an action brought by UTHE Technology Corporation (“UTHE”) against ATRM and its then sales manager for Southeast Asia (“Sales Manager”), asserting federal securities claims, a RICO claim, and certain state law claims, had been stayed in the United States District Court for the Northern District of California. UTHE’s claims were based on its allegations that four former employees of a Singapore company, which UTHE formerly owned, conspired to and did divert business from the subsidiary, and in turn UTHE, and directed that business to themselves and a secret company they had formed, which forced UTHE to sell its subsidiary shares to the former employee defendants at a distressed price. The complaint alleged that ATRM and the Sales Manager participated in the conspiracy carried out by the former employee defendants. In December 1993, the case was dismissed as to the former employee defendants because of a contract requiring UTHE and them to arbitrate their claims in Singapore. The district court stayed the case against ATRM and the Sales Manager pending the resolution of arbitration in Singapore involving UTHE and three of the former employee defendants, but not involving ATRM or the Sales Manager. ATRM received notice in March 2012 that awards were made in the Singapore arbitration against one or more of the former employee defendants who were parties to the arbitration. In June 2012, UTHE filed a motion to reopen the case against ATRM and the Sales Manager and to lift the stay, which the court granted. On September 13, 2013, the court entered final judgment dismissing all remaining claims UTHE asserted against ATRM in the litigation. On September 23, 2013, UTHE appealed the district court judgment to the United States Court of Appeal for the Ninth Circuit only as to the dismissal of UTHE’s RICO claim. The appeal was argued in a court hearing on November 19, 2015. On December 11, 2015, the court of appeal issued an order reversing the district court’s grant of summary judgment of UTHE’s RICO claim and remanded the case back to the district court for further proceedings. On April 20, 2016, the district court stayed the case pending a decision in the Supreme Court case RJR Nabisco, Inc. v. The European Community, No. 15-138. A decision in the RJR Nabisco case was issued on June 20, 2016. On July 14, 2016, ATRM filed a motion for summary judgment in the district court seeking dismissal in light of the RJR Nabisco decision. On August 26, 2016, the district court granted ATRM’s motion for summary judgment and dismissed the case. On September 19, 2016, UTHE filed its appeal to the Ninth Circuit of the district court’s grant of summary judgment and dismissal. The parties completed the appellate briefing on February 13, 2017. Oral arguments were held by the appellate court on February 14, 2018. The court is expected to render its decision on the appeal within 90 days. We continue to believe that the claims asserted in this matter do not have any merit and intend to vigorously defend the action.

KBE Building Corporation v. KBS Builders, Inc., and ATRM Holdings, Inc., et al.

At the time of the KBS acquisition in April 2014, KBS purchased receivables for a construction project known as the Nelton Court Housing Project (“Nelton Court”) in Hartford, CT, and also performed certain “punch-list” and warranty work. Modular units for Nelton Court were supplied by KBS Building Systems, Inc. (“KBS-BSI”) pursuant to a contract with KBE Building Corporation (“KBE”). KBE has asserted claims against KBS-BSI, KBS and ATRM arising out of alleged delays, and for the repair of certain alleged defects in the modular units supplied to the project. KBE’s claim seeks an unspecified amount of damages. The action has been transferred to the complex litigation docket of the Hartford Superior Court. The court has set a trial date for February 2018, but that date will likely be continued because all of the parties have participated in mediation and settlement negotiations are ongoing, so no depositions have yet been conducted. On December 18, 2017, KBS was notified that a global settlement had been reached between all defendants and the plaintiff. Under the settlement, KBS’s insurance carriers have agreed to pay $300,000 to the plaintiff.

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From time to time, in the ordinary course of ATRM’s business, it is party to various other disputes, claims and legal proceedings. In the opinion of management, based on information available at this time, such disputes, claims and proceedings will not have a material effect on ATRM’s condensed consolidated financial statements.




Item 1A.Risk Factors

Not applicable.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.Defaults on Senior Securities

None.

Item 4.Mine Safety Disclosures

None.

Item 5.Other Information

None.

Item 6.Exhibits


4.1
2.1
Promissory Note,Agreement and Plan of Merger dated March 31, 2017, madeJuly 3, 2019 by and among ATRM Holdings, Inc. for, Digirad Corporation and Digirad Acquisition Corporation (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the benefit ofSEC on July 3, 2019).
10.1
Series B Preferred Stock Dividend Agreement dated July 16, 2019 by and among ATRM Holdings, Inc., Lone Star Value Co-Invest I, LP.
10.1Securities Purchase Agreement, dated as of March 31, 2017, by and between ATRM Holdings, Inc.Investors, LP and Lone Star Value Co-Invest I, LP.LP (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on July 18, 2019).
10.2
Waiver of Promissory Note dated July 17, 2019 with LSV Co-Invest I, LP (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on July 18, 2019).
10.3
Waiver of Promissory Note dated July 17, 2019 with LSV Co-Invest I, LP (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on July 18, 2019).
10.4
Waiver of Promissory Note dated July 17, 2019 with Lone Star Value Management, LLC (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed with the SEC on July 18, 2019).
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification ofand Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ATRM HOLDINGS, INC.
(Registrant)

Date: March 23, 2018August 14, 2019By:/s/ Daniel M. Koch
   Daniel M. Koch
  President and Chief Executive Officer (Principal Executive Officer)
Date: March 23, 2018By:/s/ Stephen A. Clark
Stephen A. Clark
ChiefOfficer and Principal Financial Officer (Principal Financial and Accounting Officer)

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